Revealed: the impact of buy-to-let mortgage tax changes on the market

It’s been five years since the restriction of buy-to-let mortgage tax relief, also known as Section 24. How have these controversial tax changes affected landlords and the rental market since 2017?

Read on to find out if predictions that they’d cause higher rents, more buy-to-let companies, and landlords to sell up were right.

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How did the restriction of mortgage interest tax relief work?

Before the first stage of the tax changes in 2017, landlords could deduct all of their mortgage interest from their rental income and pay tax solely on their profits.

Between April 2017 and April 2020, mortgage interest tax relief was gradually reduced and ultimately replaced with a 20 per cent tax credit.

The 2021-22 tax year is the second full tax year in which landlords only get a 20 per cent tax credit on interest payments, instead of being able to deduct mortgage expenses from their rental income.

How have landlords been affected?

We recently surveyed over 600 UK landlords, with 33 per cent telling us that their properties are no longer as profitable following the restriction of buy-to-let mortgage interest tax relief.

Some other key findings included:

• rising taxes are a key challenge for 32 per cent of landlords
• over a tenth (11 per cent) said they’ve had to pass the cost of tax increases on to their tenants
• the impact of the buy-to-let mortgage tax changes has led to 16 per cent of landlords selling a property or considering selling one
• increased tax relief for landlords would prevent 28 per cent from selling a property in the future

Three Section 24 predictions – did they come true?

When the restriction of buy-to-let mortgage interest tax relief was first announced by then-Chancellor George Osborne in 2015, landlords expressed their concern about the impact it would have on the rental market.

Below, we’ve taken a look at some of the most common predictions made by landlords and market commentators to see if they were accurate.

Prediction 1: Landlords would sell up and leave the market

Due to rising costs and regulation, it was suggested that many landlords would exit the buy-to-let market before Section 24 was fully implemented.

Here are some key stats:

• in 2021, 27 per cent of landlords told Simply Business they were planning to sell a property (although some said this was due to the pandemic)
• the number of landlords in the UK dropped from 2.88 million in 2017 to 2.66 million in 2019, according to letting agency Hamptons
• 28 per cent of landlords told the National Residential Landlords Association in November 2021 that they were taking steps to leave the market due to Section 24 and other tax changes
• the proportion of homes listed for sale that were previously available for rent increased to eight per cent in September 2021, up from three per cent in 2019 (Zoopla)

Despite these figures suggesting that many landlords have sold up or considered doing so, there’s plenty of research that indicates the opposite.

As part of our survey last year, almost 60 per cent of landlords said they thought letting a property was still worthwhile.

Meanwhile, further research from Hamptons found that 131,900 properties were sold by landlords in Great Britain in 2020, the smallest number sold in one year since 2013. It’s important to note that this figure is likely to have been significantly impacted by Covid-19 restrictions.

Verdict: There are lots of conflicting studies and it’s hard to say for certain how many landlords have sold up as a direct result of Section 24. However, it’s clear that the severity of the tax changes has caused many landlords to assess their finances and consider their position, even if they decided to continue letting their property.

Prediction 2: Average rents would increase as landlords’ profits decrease

With mortgage tax relief changes putting more pressure on landlords’ finances, it was predicted that they’d have to increase rents to remain profitable.

The table below shows the average national asking rent (excluding Greater London) tracked across six years by Rightmove.

As you can see, average rents increased significantly between 2017 and the end of 2021, by which time mortgage interest tax relief had been reduced in full.

Meanwhile, research by Zoopla shows that average rental growth was particularly high towards the end of 2021, reaching a thirteen-year high.

Alongside Section 24 there are many other factors that are likely to have contributed to rising rents, such as:

• the ban on upfront letting agent fees
• changes to stamp duty and capital gains tax
• new regulation such as mandatory electrical safety checks
• higher tenant demand
• lower stock levels

Verdict: There are too many factors to conclusively prove whether the tax changes have caused rents to rise. It’s clear, though, that average rents have been on an upward trajectory since before 2017 and that tougher financial conditions for landlords have resulted in higher rents for tenants.

Prediction 3: Landlords would transfer property ownership to limited companies

One way landlords can minimise the impact of the restriction of mortgage interest tax relief is to transfer ownership of their property to a limited company. As a result, it was predicted that there’d be a surge in the number of landlords starting buy-to-let companies.

Landlords who incorporate their portfolio pay corporation tax instead of income tax, meaning they don’t suffer from Section 24 restrictions and benefit from several other tax incentives.

Companies House data, analysed by Hamptons, shows a rising trend in incorporating buy-to-let companies in recent years:

There’s also been a surge in the number of buy-to-let mortgage products suitable for limited company landlords to reflect demand.

Further analysis from Hamptons shows that between the beginning of 2016 and the end of 2020, more companies were set up to hold buy-to-let properties than in the previous 50 years combined.

At the end of 2021, there were almost 270,000 buy-to-let companies in the UK, up from around 200,000 in mid-2020.

Verdict: While incorporation isn’t suitable for all landlords, it’s clear there’s been a significant shift to limited company ownership since the start of Section 24 changes. Read our guide to setting up a property company for more information on the pros and cons of this approach.

What’s the rental market outlook for the rest of 2022?

Against a backdrop of complex tax and regulation changes there are plenty of other challenges facing landlords this year, such as:

• rising interest rates, which could lead to higher buy-to-let mortgage costs. Read our interest rates update for more information
• the cost of living crisis, which could put pressure on tenants’ finances and cause problems for landlords who offer properties with bills included
• required energy efficiency improvements, which could cost landlords thousands of pounds to make, or stop them from being able to let their property altogether

That being said, average rents and property prices continue to rise while demand from tenants remains high. These factors, combined with limited property supply, mean that landlords can still generate a healthy rental property yield over the long-term.

Read our article on what landlords need to look out for in 2022 to make sure you’re up to speed on this year’s key rental market themes and events.

How have you been affected by the changes to mortgage interest tax relief? Let us know in the comments below.