Posted: 21 Apr. 2021 5 min. read

The Buy-to-Let Sector

Over the past few decades residential landlords and owner-occupiers have enjoyed unprecedented levels of capital growth on residential properties, with landlords also benefitting from rental growth in what is known as the Private Rented Sector (‘PRS’). The average UK house price has increased by an astonishing 323% over the past thirty years, based on the latest data from Land Registry. On the back of this, confidence in the sector has grown, encouraging more and more single investors into the BtL market, due to cheap borrowing costs and an increase in tenants who are unable to get onto the property ladder. It is now reported that there are currently approximately two and half million landlords in the UK.  

In the present economic and political climate it is unlikely that landlords will benefit from the same level of capital gains experienced historically thus investors will increasingly focus on the rental return of an asset.  As well as a lack of positive housing forecasts, buy-to-let investors have been confronted by a wave of fiscal and regulatory changes in recent years, in addition to the increased risk associated with tenants defaulting on their rental payments due to COVID-19. These problems have been exacerbated by temporary restrictions inhibiting landlords from evicting most tenants who are in arrears on rental payments.

So what have been the key changes in the sector?

Stamp Duty Land Tax (SDLT): Recent figures from H2 2020 show that the temporary reduction in SDLT through an increase in the nil rate band from £125,000 to £500,000, which came into effect on 8th July 2020, has resulted in an increase in transactions from BtL investors; agents have reported that this policy has boosted market activity as homebuyers and investors try to complete purchases within the relaxation window. Amid concerns of a cliff-edge scenario SDLT Holiday concession has been extended for 3 months for completions occurring on or before 31 June 2021.  For completions between 1 July and 30 September 2021 the exempt amount is being tapered down from £500,000 to £250,000.  The SDLT bands and rates then revert back to the usual pre-COVID ones from 1 October 2021. Many economists are expecting the property market to cool significantly once the government withdraws its support packages and reinstates higher SDLT on property transactions.

The changes made to Stamp Duty in 2016 remain in force, namely a 3% SDLT surcharge for buy-to-let property and second homes, which increased the barrier to entry for new investors and established investors expanding their portfolios. This fiscal measure introduced by the government has had a damaging impact upon the property market as market participants are less willing to invest, as evidenced by the reduction in the volume of transactions since 2016.

Mortgage Interest: The government announced another wave of tax changes in respect of phasing out mortgage interest relief in exchange for 20% tax relief on mortgage interest incurred. From 2017 mortgage interest relief has been gradually reduced to the point where there was no relief in the 2020 tax year. Going forward landlords will not be able to include any mortgage interest as a deductible expense.

This is already having a measurable impact on those who are more highly geared and in higher tax brackets, as tax is now payable on rent received (subject to acceptable deductions), rather than net rent post deductions and mortgage interest incurred. These tax changes have significantly increased the tax burden on many landlords and reduced their rate of return thus deterring some investors from the market.

Regulations: Like most sectors, buy-to-let has been subject to a changing environment as a result of a raft of regulations with which investors must comply. As critics of the PRS mount, the government has responded with new policies and regulations in an effort to increase the affordability of the sector as well as the quality and safety of residential accommodation across the UK. Agendas are also focusing on the impact of property as a contributing factor to climate change, such as more stringent EPC (Energy Performance Certificates) requirement.

In particular, local councils are adopting more stringent policies for Houses in Multiple Occupation (HMOs). These assets have been desirable for investors over the years as the efficient use of the property enables multiple ‘households’ to be accommodated under one roof. This structure has been used by landlords to capitalise on higher returns from their property asset. However, the threshold for licencing has reduced in recent years increasing the number of properties requiring an HMO licence. The licence is not only another cost borne by landlords but in many cases there is also a capital cost implication to meet the minimum standards for HMO’s as stipulated by the Housing Act 2004.

Rise of the Private Rented Sector: The PRS has expanded significantly to account for approximately 20% of all UK households as a result of the steady increase of ‘Generation Rent’. The popularity of the sector has increased as investors seek to benefit from increasing capital values and rental yields.

Fundamentally the PRS is attractive to investors who are seeking to acquire long term income producing assets. These strategies have helped propel investment and growth in the Build-to-Rent sector which has interestingly seen 35% of investment in the first three quarters of 2020 coming from investors new to the UK BTR sector. It is not only the private sector seeking opportunities in this space; we have observed the public sector's increased appetite too. Partners such as Transport for London and Grainger demonstrate this, as organisations seek to deliver diversification and income producing assets through BTR ventures.


Overall, whilst the landscape of residential property continues to adapt, the nature of the underlying asset will continue to draw investors to the sector as the tangibility of property and the perceived security of the asset class remains the key driver for the sector. However the sector is likely to see further increases in regulation which will ultimately be a cost swallowed by the investor. In an ever-evolving digital world where a rating of some description is almost inevitable, it is likely that there will be a recognised online platform or similar where landlords are scored in a bid to promote trust and transparency in the sector.

Despite the drawbacks, the sector continues to attract investors of all sizes which is unlikely to change for the foreseeable future. However, as the impact of COVID-19 plays out investors are expected to be sensitive to certain asset types which are most significantly affected. It is anticipated that investors will continue to respond to the changing dynamics and landscape; one trend in recent years has been the rise of individuals using Limited Liability Companies as a vehicle to invest in property due to the perceived tax benefits, even though any realisable benefits will ultimately depend upon individual circumstances. Likewise, more opportunities by larger institutional investors have been sought using Real Estate Investment Trusts based on their tax efficient structures.

To summarise, the PRS will be a captivating space to watch as new providers to the sector will inevitably increase the levels of innovation as they battle to incorporate technology. The outcomes of which will shape the future built environment and stretch the boundaries of how we occupy and live in buildings.

Sign up for the latest updates

Key contact