Landlord? Why 2024 might be time to diversify
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.
Recent years have not been particularly kind to many UK landlords. Not only did the Coronavirus Act 2020 delay when landlords could evict rogue tenants (resulting in huge losses for some), but various tax benefits have also been withdrawn. In particular, landlords can no longer claim tax relief on interest from a buy-to-let (BTL) mortgage.
With the arrival of the new Labour government in July 2024, there is some concern that the policy environment could become harsher for landlords in the coming years – e.g. stricter rules on evictions and eco-refurbishment.
Below, our Grantham financial planners explore why 2024 could be a good time for landlords to review their portfolios, considering options beyond property. We hope these insights are helpful. To discuss your own financial plan with us, please get in touch to arrange a no-obligation financial consultation at our expense:
01476 855 585
info@casfin.co.uk
The direction of travel
In 2024, almost one-third (31%) of UK landlords are planning to cut the size of their property portfolios, according to the National Residential Landlords Association (NRLA). Many landlords are finding it harder to turn a profit from BTL and other property investments.
We have already mentioned the abolition of mortgage interest tax relief. Since April 2020, a flat credit of 20% is now available, replacing the previous system which was based on individual tax brackets (allowing relief up to 45%). This has made BTL less viable for taxpayers in the Higher Rate and Additional Rate bands.
More recently, many landlords have been hit by the gradual reduction in the tax-free allowance for capital gains (the Annual Exempt Amount). In 2022-23, this stood at £12,300, enabling many landlords to “shield” much of their profit from capital gains tax (CGT) when selling an additional property (like a BTL). However, in the following two tax years, this was reduced to £6,000 and then to £3,000.
To top it all off, interest rates have risen rapidly since December 2021. This has resulted in higher mortgage payments for many landlords, such as those reaching the end of their fixed-rate deals. Some landlords are even paying double compared to three years ago. Meanwhile, wages have stagnated in recent decades and the cost of living crisis has eroded disposable incomes since 2022. As a result, it has not always been possible for landlords to pass on their higher costs to their tenants.
Should I get out of buy-to-let?
This is a very personal decision, and the answer depends very much on your unique financial goals, values, risk attitude and circumstances. Many landlords continue to make good profits despite the above. Moreover, there are still strong tailwinds behind UK property, such as constrained national supply (adding upward pressure to prices) and the high likelihood of rising demand in future years as the UK population continues to grow.
However, significant tailwinds are making it harder for landlords to succeed. House prices have run away from wages, dampening demand as many workers deem it unaffordable to get onto the housing ladder. The new Labour government has announced ambitious new house building plans (300,000 new builds a year), which could extend supply and push down on further property price growth. There is also the possibility of further tax rises, which might punish landlords even more. One potential outcome (not confirmed) is that CGT rates could change later in the tax year. If CGT rates are brought into line with income tax bands, for instance, then many landlords could see their gains further eroded by tax if they sell up.
You also need to consider the potential “hidden costs” of being a landlord. In particular, a troublesome tenant could be very financially destabilising. If a tenant stops paying their rent, legal action may be required to evict them. This incurs legal costs and could take several months to resolve, resulting in lost rental income along the way. If the Government extends tenants’ rights even further, as it has been doing under its new Renters’ Rights Bill, then these costs could be deepened for landlords.
A way forward for landlords
The best way to decide on your course as a property investor is to speak with a financial adviser. This allows you to explore different ideas using the best, most up-to-date information. With that said, we suggest that all landlords will benefit from considering the time-honoured principle of diversification.
Diversification states that investment risk should be “spread out” across multiple investments. The danger with BTL investing is that it often involves putting “too many eggs in one basket”. A large up-front sum is required to secure the mortgage, and this can represent a significant portion of an individual’s overall wealth. As a result, the investor might be left overly exposed if the investment goes wrong, especially since property – as an asset class – is highly “illiquid” (time-consuming and costly to sell).
There are many asset classes beyond property which can help a BTL investor achieve greater diversification, such as cash, equities and bonds. Many of these can be accessed via tax-efficient “vehicles”, such as pensions and ISAs, which help investors keep more of their capital gains, dividends and interest earnings. With the help of a financial adviser, you can explore your diversification options with greater confidence and clarity, arriving at decisions which give you peace of mind about your BTL investment(s).
Invitation
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
Kevin Adlington
Financial Planner
Kevin has over 32 years of experience in financial planning and joined Castlegate in 2023, specialising in investment, pension, protection and estate planning.
Email: kevin.adlington@casfin.co.uk
