Death of the buy-to-let landlord

23 May 2023

This is a challenging time for many people living in rented accommodation, who have already seen increases to their rental payments or may be facing up to that prospect in the coming year. With interest rates rising and other costs going up, private rental prices increased by 5.0% in the 12 months to May 2023 according to the latest figures from the Office for National Statistics

Whilst there are increased costs for landlords, there are also reports of a rental property shortage, with demand also a potential factor in pushing up rental prices. We are seeing more landlords exploring their options and considering whether they should exit the market. That is in part due to the increased tax burden placed on buy-to-let landlords, in particular as a result of the restriction on tax relief for mortgage costs. It can also be down to other factors, in particular landlords reaching retirement age may have a waning appetite to continue with an increasingly challenging investment.

The bad news for tenants is that the lack of rental properties on the market may get worse over the coming years. The Department for Levelling Up, Housing and Communities periodically publishes findings from its English Private Landlords Surveys. The most recent of these were the surveys undertaken in 2021 and 2018

The 2018 survey indicated that 58.6% of landlords were aged 55 and over, with 27.9% at least 65 years old. Those figures increased in the 2021 survey to 62.8% and 31.7% respectively. The figures suggest that the share of rental properties owned by those at or nearing retirement age is increasing.

With the inheritance tax (IHT) nil rate band frozen until 2028 and property prices still rising, we could see more landlords facing up to a sizeable IHT bill on their death. In turn, this could result in rental properties being sold by executors to settle IHT liabilities. 

Whilst many consider that you can plan ahead to manage an individual’s exposure to IHT, it is difficult to do so with rental properties. There are various tax reliefs for trading businesses that help to ensure IHT does not have a material impact on business succession. A buy-to-let business may be run professionally and in a similar way to a trade, but it generally does not benefit from these tax reliefs. For many landlords, they cannot simply gift their rental property to others during their lifetime either, as this could trigger a capital gains tax (CGT) liability at up to 28%. Indeed, it is possible that such a gift could trigger CGT and then still remain subject to IHT, at up to 40%, if the gift is not survived by seven years.

The prospect of more homes becoming available for sale on the market may sound like good news to first-time buyers in particular. For every rental property sold to a new owner-occupier, the demand for rental properties should arguably reduce, at least to some extent. However, unless there is a substantial reduction in average house prices, there may continue to be a strong demand for rental properties due to the amount of time it can now take first-time buyers to save for a deposit.

A tax timebomb lies in wait for both landlords and tenants. If the number of rental properties in the market decreases due to IHT bills, it could compound problems for tenants if demand forces rental prices up even higher.