What is the future for residential investment property?

17 May 2024

The UK has historically been a sought-after destination for those looking to own property, both for personal use and as an investment. 

The changing environment

Tax changes introduced in recent years have made ownership of residential property as an investment much more expensive. Owners of rental properties now have big decisions to make that could have knock-on effects for owner-occupiers as well. 

1. Furnished holiday lettings 

Under current furnished holiday lettings (FHL) rules, short-term holiday rental properties qualify for more favourable tax treatment than that from long-term rentals. Although relief for mortgage interest on loans taken out to purchase ‘buy-to-let’ residential property was restricted from 6 April 2017, landlords with qualifying properties have still been able to rely on the FHL rules to claim a full deduction for loan interest paid against profits. Other tax advantages of FHLs include net profits qualifying as ‘relevant earnings’ for purposes of tax relief for pension contributions, the availability of capital gains tax (CGT) reliefs on disposals, and eligibility for business rates rather than the generally higher levels of council tax.

Arguably the current FHL rules make little sense in tax or economic terms, and the government has announced it will abolish them entirely from 6 April 2025.

Abolition of this favourable tax regime could lead to increased tax revenue from FHL businesses and council tax on second homes, but many FHL landlords may look to exit the market altogether as post-tax investment returns fall, increasing property sales and possibly also the number of long-term rental properties. In either case, the changes to the property market are likely to be welcome to anyone looking to buy or rent in areas with large numbers of FHL properties.

2. Informal landlords

Airbnb has increased the popularity of more informal residential property rental arrangements over recent years.

HMRC now actively reviews owners of Airbnb accommodation and similar ‘casual’ landlords, and we expect to see a resulting increase in HMRC enquiries over the next few months. The Treasury has estimated that over 50% of those involved in economic activities facilitated through digital platforms, including those that enable individuals to rent property such as Airbnb, were unaware of their tax payment obligations in 2016.

Informal landlords using these platforms will need to be mindful of their tax reporting and payment requirements and ensure their affairs are brought up to date to mitigate against the potential for penalties and interest on late tax arising from possible investigation by HMRC.

3. Non-UK domiciliaries regime

The abolition of the tax favoured status for non-UK domiciled individuals (non-doms) from 6 April 2025 looks likely to lead to some wealthy individuals leaving the UK.

This might lead to more properties coming on to the market in London and the South East especially, but some families may choose to retain their UK homes for use when they visit. It may be that the effect of the non-dom changes may be felt in a reduction of new investment in UK residential property from outside the UK. 

4. Property stamp taxes

The current high levels of stamp duty land tax (SDLT), and the equivalent property stamp taxes in Scotland and Wales, payable on the purchase of expensive and second properties have led to many attempts to take advantage of reliefs that can reduce tax rates. In particular, the courts have seen many failed attempts to claim relief from SDLT for certain properties, either on the grounds that they have both residential and non-residential elements, or that they comprise more than one dwelling.

From 1 June 2024, SDLT multiple-dwellings relief will be abolished, with the chancellor recently stating that there is a lack of evidence that the tax break intended to support investment in the private rental sector has achieved this purpose. In some cases, the abolition of this relief will lead to a considerable increase in the acquisition costs of residential property, and may discourage property investment by landlords looking to buy a whole block of flats for example.

5. Council tax on second homes

Second homeowners could also see changes to council tax from April 2025, as councils have been given the discretion to charge additional council tax on furnished homes not used as the owner’s sole or main residence. Combined with the FHL changes, this will push up running costs of second homes in many areas, and may even encourage owners of such properties to sell.

6. Reduced CGT rates on residential property

From 6 April 2024, the higher CGT rate that applies to gains on disposal of residential properties has reduced from 28% to 24%. This reduction is specifically designed to incentivise second homeowners or those with buy-to-let properties to sell now and, as a result, reduce housing shortages and increase the number of properties available to first time buyers or those looking to move. The chancellor expects the rate reduction to increase tax yields in the short term, as more properties are put on the market.

Uncertain times ahead?

The combination of removing FHL reliefs, reducing CGT rates, increasing council tax on second homes and the non-dom changes could have a profound effect on the UK housing market. It would not be a surprise to see a trend over the coming months of landlords refocusing their activities or leaving the market entirely. Whether house prices will come down is hard to judge, but at least there may be an increase in the number of properties available to rent or buy.

For more information, please get in touch with Andrew Robins or your usual RSM contact.

Laura Greenhill
Laura Greenhill