Landlord news: profits down as CGT and insurance costs continue to rise

If you have a buy-to-let portfolio, reading the daily news has become a gloomy occupation. Indeed, increasing numbers of landlords have decided to sell up. In this landlord news update, we take a look at three topics of concern: shrinking profits, a likely rise in insurance costs and a probable cut in the Capital Gains Tax threshold.

Landlord profits to shrink to £7?

The first landlord news item comes from the Daily Telegraph, which calculated that the average profits from buy-to-let would slump to £7 per year.

The driver behind this huge drop in profit is increased buy-to-let mortgage costs. The Telegraph uses an example provided by Hamptons estate agents. It is of a landlord who bought a property in 2020 with a 1.89% mortgage. This would have led to interest payments of £2,261 per year. As an average higher-rate taxpayer, their profit would have been £2,526.

However, if the same landlord re-mortgaged the property today, annual interest payments would rocket to £7,127. Even taking into account the 24% average rent growth over the period, this would see the landlord’s profit sink to £7.

Worse still, landlords in five areas of the country will find their properties become loss-making. These are: London, East of England, the South East, the South West and the West Midlands. These areas have higher house prices, thus leading to higher mortgage costs.

As a result, many landlords will face three options. These are: huge rental increases, putting capital into their mortgages to reduce repayments, or selling up.

Rising rents and landlord insurance

While putting up rents may seem a logical solution, there are signs that many tenants are already struggling to pay rent at current levels.

According to insurer Alan Boswell Group, rent guarantee insurance claims spiked 46% higher in October 2022 when compared with six months earlier. Demand for such policies also grew by 60% during the same period, suggesting that more landlords are expecting tenants to have difficulties paying up.

The inevitable consequence of this pattern is that landlord insurance costs are going to go up. So if you haven’t currently got rent guarantee insurance, now may be a good time to get it. Insurers are also likely to tighten up their acceptance criteria, meaning you’ll almost certainly need to use the insurer’s tenant referencing service and choose tenants with a high rent-to-income ratio.

CGT – more bad news for landlords?

If you decide that selling up is the best option, you need to be aware that changes to the Capital Gains Tax system announced in the 2022 Autumn Statement make this even more expensive.

Chancellor Jeremy Hunt’s cut to the CGT tax-free allowance from £12,300 per year to £3,000 from April 2024 means basic-rate paying landlords pay 18% CGT on gains over £3,000. From April 2024, higher-rate taxpayers face a bill of 24%. For a higher-rate taxpayer making a net gain of £100,000 on a second home this would lead to an eye-watering CGT bill of £23,280.

Should I put more capital into my properties?

If you can’t raise rents and you don’t want to sell your buy-to-let properties, the third way of reducing your costs is to put more capital into your portfolio. This will reduce the amount of interest you have to pay. It’s certainly a strategy worth considering if you have the capital available.

However, if you are looking for ways of protecting your margins, we strongly recommend our special Landlords’ Platinum Accounting Service. This not only provides you with free software that streamlines the way you manage your portfolio, but it also gives you a raft of other benefits, including arrangement of fee-free mortgages via our mortgage broker partners. Call us now on 0800 6520 025 to find out more.