Is a Labour landslide good or bad for Buy-to-Let property owners?

The landslide general election victory for Labour brings a new wave of policies and reforms expected to impact the UK property market, specifically the buy-to-let sector. Here, we break down our views on the key takeaways for prospective and existing buy-to-let property owners:

Our 5 key takeaways:

1. Company Ownership: For most potential buyers, using limited companies to own buy-to-let (BTL) property could help reduce the impact of potential higher capital gains tax (CGT) and Inheritance tax (IHT) rates.
   

2. Property Portfolio Pensions: If pension tax relief is reduced, explore the option of building or adding to your own private pension through a property portfolio.
   

3. Leverage Low Mortgage Rates: The anticipation of lower mortgage rates presents an opportunity for BTL owners to take advantage of low borrowing costs and enhance cash flow and profitability on both existing and new buy-to-lets.
   

4. Stay Informed on Housing Policies: It seems inevitable there will be some changes made which will impact the market, as always, it’s key to monitor the government's housing initiatives and their impact on property prices and rental demand.
   

5. Adapt to Rental Sector Reforms: Embrace higher standards and professional practices in response to rental sector reforms, those who don’t will be forced to exit the market leaving higher demand for the remaining rental properties in your area.

Increased Capital Gains and Inheritance Taxes: Limited Company Advantage

One of the major concerns for property owners is the expected increase in capital gains tax (CGT) and inheritance tax (IHT). Labour is expected to raise these taxes to redistribute wealth more effectively and fund public services.

Capital Gains Tax (CGT)

Currently, individuals selling property face CGT at rates of 18% to 24%, depending on their income bracket. Labour's potential increase in CGT could see a rise in the rate or a further reduction in an individual’s annual exemption allowance, both would further minimise profits for owners when they look to sell the property. However, properties owned by limited companies are subject to corporation tax on disposal, currently ranging from 19 to 25% depending on company profits.

Inheritance Tax (IHT)

Inheritance tax is charged at 40% on estates worth over £325,000. Labour's potential reforms could see a reduction in exemptions and an increase in rates. However, for properties held within limited companies, IHT is levied on the shares of the company rather than the individual assets, which could offer tax planning advantages. Further, IHT planning through leveraging share classes could reduce this even further if done correctly with a good accountant.

Summary

For individuals, the solution may lie in structuring BTL property purchases through limited companies. This approach can mitigate the impact of higher CGT and IHT rates, as company assets are taxed differently. By continuing to buy properties as company assets, owners can benefit from the relatively lower corporation tax rates and more favourable IHT treatment.

Reduced Tax Relief on Pension Contributions: Opportunity for Property Portfolios

Labour has also hinted at reducing tax relief on pension contributions, which has traditionally benefited higher-rate taxpayers. This change could make pension contributions less attractive, potentially opening the door for more individuals to build private pensions through BTL property portfolios.

Building Private Pensions Through Property

With reduced incentives to contribute to traditional pensions, investors might find property portfolios a compelling alternative. BTL property offers the potential for capital appreciation and rental income, providing a steady income stream in retirement. Additionally, leveraging financing products like BTL mortgages can amplify returns, making property a viable option for building and/or supplementing existing private pensions.

Summary

If this change were to be implemented, it may make property a more attractive alternative. However, considering the income tax on your money before being able to invest it in a property, we wouldn't expect this to have a substantial impact on BTL buyers.

Keeping Mortgage Rates Low: Benefiting First-Time Buyers and BTL Investors

Labour has committed to keeping mortgage rates "as low as possible" to help first-time buyers get onto the property ladder. This policy will also benefit the BTL market, as banks will continue to offer competitive BTL mortgage products based on the base rate.

Impact on the BTL Market

Low mortgage rates mean lower borrowing costs for buyers, enhancing cash flow and profitability. This can encourage more investment in the BTL sector, as investors can secure affordable financing to expand their portfolios. Moreover, sustained demand from first-time buyers can drive property price growth, further benefiting BTL owners.

Summary

Overall lower mortgage rates are a positive for property owners, especially BTL owners, as it presents the opportunity to refinance existing mortgages to either generate more monthly cash flow from the rental income or fund further acquisitions.

Increased Building of New Homes: Impact on Market Dynamics

Labour plans to increase the building of new homes through changes to the national policy planning framework. This includes prioritising development on brownfield land and potentially opening up low-quality greenbelt (also known as ‘grey belt’ land for housing).

Affordable Housing Initiatives

Labour aims to build 300,000 homes annually over the next five years to meet their 1.5 million homes target. While this ambitious plan would go a long way to addressing the chronic housing shortage in the UK, its success depends on developer participation and overcoming historical challenges in meeting housing targets.

Summary

If Labour succeeds in significantly increasing the housing supply, it could slow property price growth and reduce rental demand as more people move into homeownership. This might make the BTL sector less attractive to some individuals. However, the actual impact will depend on Labour’s execution and the market response to these new proposed housing developments.

Leasehold Reform: Moving to Commonhold Tenures

Labour has pledged to reform the leasehold system and move to commonhold tenures as the default for new properties, aligning with practices in many other developed countries.

Leasehold vs Commonhold

The leasehold and commonhold systems represent different ways of owning property. In a leasehold arrangement, the buyer owns the property but not the land it sits on, and the ownership is for a fixed term, typically 99 to 999 years. The freeholder (landowner) retains the land ownership and the leaseholder may face restrictions on how the property is used. Maintenance and service charges are also typically controlled by the freeholder.

In contrast, commonhold ownership means the buyer owns the property outright, including a share of the land and communal areas. This type of tenure removes the ground rent and service charge burdens often associated with leaseholds and provides more control and flexibility over the property. It also aligns UK property ownership practices with those in many other developed countries, promoting a more straightforward system than the historic leasehold system.

Summary

While this represents a change from the status quo, it is not necessarily a negative for BTL owners. Commonhold tenures could reduce service charges and provide greater autonomy over property management. This reform could enhance the appeal of new properties to investors by offering a more straightforward and cost-effective ownership structure with fewer restrictions.

Abolishing Section 21 and Renters Reform Bill: Raising Rental Sector Standards

Labour has pledged to abolish Section 21 of the Housing Act 1988, effectively banning no-fault evictions on day one in office. They also plan to advance some of the ideas proposed in the Renters Reform Bill, rebranded as a "renter's charter," to protect tenants from exploitation and discrimination.

Professionalising Buy-to-Lets

The proposed measures will require landlords to act more professionally, ensuring timely maintenance and fair treatment of tenants. While some might view this as a negative, in the long term, these measures can enhance the reputation of the private rental sector, making it more attractive to prospective tenants. Higher standards of maintenance and tenant care can lead to better tenant satisfaction and retention, reducing turnover and vacancy rates for owners. Additionally, properties that are well-maintained and compliant with health and safety standards can achieve higher rental yields and property values.

Introduction of 'Awaab's Law'

One significant proposal is the introduction of 'Awaab's Law,' which currently applies only to social housing, to the whole private rental sector. This would mandate that landlords investigate and fix reported health hazards within a specified timeframe. Extending this law to private rentals would ensure that all tenants, not just those in social housing, live in safe and healthy conditions.

Impact on Rent Increases

While increased regulation might initially seem challenging, landlords can maintain their return on investment (ROI) by implementing small, regular rent increases in line with market changes instead of leaving the rents to stagnate during tenancies. This approach can provide a more stable and predictable income stream for landlords and avoids the need for significant rent hikes and subsequent no-fault evictions, which will be banned under the new legislation. By staying on top of maintenance and adopting a proactive approach to tenant relations, landlords can ensure steady income and long-term profitability.

Summary

Overall, the push for more professional landlord practices, bolstered by measures like 'Awaab's Law,' aims to create a fairer, safer, and more stable rental market. Investors should view these changes as an opportunity to improve their properties and attract quality tenants, ultimately benefiting from a well-regulated and reputable rental sector.

Expected Stamp Duty Increase for Overseas Investors

Labour has pledged to abolish Section 21 of the Housing Act 1988, effectively banning no-fault evictions on day one in office. They also plan to advance some of the ideas proposed in the Renters Reform Bill, rebranded as a "renter's charter," to protect tenants from exploitation and discrimination.

Strategy for Overseas Investors

Overseas investors can mitigate the impact of higher stamp duty by purchasing properties through UK-based limited companies. This strategy allows them to avoid the additional 2% current stamp duty surcharge along with the potential 1% increase. UK limited companies pay a flat fee of 3% instead of 5-6%, potentially halving the tax payable.

Summary

Currently, investing through a limited company for overseas buyers presents benefits. We expect this situation to remain unchanged, regardless of the proposed increase in stamp duty.

Conclusion

Labour's victory in the general election could lead to various changes in the BTL market. The expected increases in capital gains and inheritance taxes emphasize the importance of structuring property purchases effectively from the start. With the potential for reduced tax relief on pension contributions, more investors may turn to property portfolios as a retirement strategy.

Labour's pledge to maintain low mortgage rates and boost housing supply offers both opportunities and challenges for BTL owners. Reforms to leasehold and the removal of Section 21 seek to professionalize the rental sector, ensuring better standards and fair treatment for tenants. Additionally, the anticipated stamp duty hike for overseas investors highlights the advantages of purchasing properties through limited companies.

As the situation evolves, staying informed and adaptable is crucial for property investors. At Seven Generations, we are committed to assisting you in navigating these changes and making well-informed decisions regarding BTL property. Feel free to reach out to us for further insights and guidance on optimizing your BTL property purchases in this new political climate.