Why are buy-to-let landlords rushing for the exit?

The Government has given buy-to-let landlords two compelling reason to sell-up, and fast: first is the overhaul of the rental rules coming next year, with indefinite tenancies and the end of section 21 evictions, and second comes the eroding of capital gains tax, tax free allowances.

A crisis in rental housing

When letting agents are resorting to sealed bids for tenancies, and bidding wars that are driving would-be tenants crazy are in evidence across the country, it underscores crisis description, and the plight that people are going through, desperate for good quality rental accommodation at a reasonable price.

The big landlord sell-off is not only creating this massive problem at the middle and top end of the rental market, its exacerbating the eviction problem at the bottom end, resulting in a homelessness crisis.

The shortage of housing is seeing tenants queuing in the streets for a viewing at one end of the spectrum, and rents are being pushed up, while at the same time tenants are being thrown out onto the streets.

Some agents are even asking for tenant CVs to evaluate their applicants backgrounds as if applying for a job, before agreeing a new let. According to one London letting agency, Atlas Property, managing over 500 properties, the number of tenants submitting CVs to help them secure a let has jumped by 20 per cent over the last 12 months.

A radical overhaul of tenancy laws

The Conservative Government after media pressure promised to end the practice of no-fault evictions over three years ago, and this is due to become law next year under the passing of the Renters’ Reform Bill. So time is pressing for landlords. This Bill and its radical overhaul of the Private Rented Sector in England is set out in the white paper, A fairer private rented sector.

The proposed new reforming legislation includes some sweeping changes such as no fixed-term tenancies, restrictions on rent increases, longer notice periods, increasing tenants powers to challenge evictions, no bans on pets, DSS and families etc.

The pendulum appears to be swinging, shifting the balance of power away from landlords and putting it more into the hands of their tenants. What is frightening many landlords is that these laws could make difficult to remove bad tenants.

Reduced capital gains tax allowances

The reduction in capital gains tax (CGT) allowances from April next rear is prompting a further exodus of landlords, now desperately looking to sell-up quickly to beat the April 2023 deadline.

Since last month’s Autumn Statement announcing the reduction in CGT allowances, coupled with the regulatory threat, agents are reporting an unprecedented number of landlords looking to sell-up with enquiries hitting a 13-year high.

The Chancellor Jeremy Hunt announced the changes to CGT allowances last month which means that people disposing of most types of investment assets will pay more CGT from next April: the personal allowance will fall from the current £12,300 to £6,000 in April 2023, and will fall further in April 2024 to £3,000.

Whereas a coup selling a jointly owned buy-to-let are currently allowed a gain of £24,600 before paying any CGT, they will only be allowed a £12,000 gain next year and a £6,000 gain in 2024, a massive reduction.

Tom Cranenburgh of the GetAnOffer Estate Agency told City A.M. that enquires by landlords wanting to sell were multiplying, hitting a 13 year high.

“The changes to Capital Gains Allowance couldn’t really have come at a worse time for landlords. Right now many are already facing a reduction in property values, rafts of new regulation and the prospect of many of their tenants struggling to pay their rent due to the cost of living crisis. Many are reacting to this unwelcome blow by already opting to quit the market and sell up,” Mr Cranenburgh says.

Selling with vacant possession

It is generally easier and more lucrative to sell a house or flat with vacant possession, so many landlords are opting to serve a Section 21 notice (two months notice) whilst they are still available – next year they will be gone.

It can still take several months to remove a tenant with Section 21 so time is pressing as there’s no telling exactly when the ban will apply next year, but probably unlikely before April. However, catching the capital gains tax higher allowance means the sale needs to go through before then.

Some landlords will attempt to sell-up with tenants in situ, but finding another landlord willing to buy a tenanted property may not be so easy.

Capital Gains Tax rates in the UK for 2022/23

For the current year, 2022/2023 tax year capital gains tax rates will be:

18% for residential property for your capital gain if your overall annual income is below £50,270

28% for residential property for your capital gain if your overall annual income is above the £50,270 threshold

For other assets basic rate taxpayers pay 10 per cent CGT on most asset sales and higher rate taxpayers pay 20 per cent CGT on most asset sales.

You then have the current £12,300 capital gains tax allowance per person which means your capital gains up to £12,300 are tax free.

Company dividends

Landlords who manage their rental properties through a limited company will usually pay themselves through dividends. These payments will also be affected by the changes to dividend allowances announced by Jeremy Hunt last month: this means for next April the £2,000 a year tax free allowance (previously £5,000) comes down to £1,000, and from April 2024 this will halve again to £500.