Growth plan how it affects the property market

The Government’s Growth Plan following Kwasi Kwartengs disastrous mini budget included some major tax measures. However, many of these measures were then reversed or scrapped in October 2022, following the huge reaction in the markets and economically.

Some of the tax measures announced in the Growth Plan however, do remain in place and will affect landlords and the property market as a whole. The Growth plan did lead to many mortgage lenders pulling deals from the market and hugely affected landlords.

The growth plan has severely affected the property market, with rising interest rates and some mortgage providers significantly affecting the number of mortgage deals on offer. With the buy-to-let market already under strain and many landlords pulling out of the market, as the ongoing credit crunch continues to bite, how is the property market affected? In this blog, we look at how the growth plan and subsequent government changes and announcement will affect landlords and the property market as a whole.

The housing market in 2023

Rising interest rates and the cost of living crisis are now hitting hard on housing markets and the housing sector is struggling, according to data from some of the major banks and building societies.

UK rents are expected to rise 4% in 2023, driven by an ongoing imbalance between rental demand, the housing supply requirements and market supply in rental properties.

Average house prices have dropped at the beginning of 2023. UK house prices are predicted to drop 6% before recovering in 2024. Falls are set to range from around 4% in Greater London and 5% in Scotland, to around 8% in Wales, the north east and Yorkshire & The Humber.

But the outlook for the UK’s city centres is much brighter. House prices are expected to grow in many of these areas, eclipsing the wider housing market.

Some landlords, particularly well-financed ones, could take lower house prices as an opportunity to purchase some properties at potentially reduced prices.

The rental market 2023

Rising demand for rental properties is set to continue in 2023. The cost of living crisis, low wages and high mortgage rates a will mean some people may delay from buying their first home. The end of Help to Buy Scheme in March may also lead to some people staying in the rental market for longer.

What is the governments growth plan?

The Growth Plan 2022 makes growth the government’s central economic mission, setting a target of reaching a 2.5% trend rate. However, with the UK in the middle of a cost of living crisis and currently facing a period of high inflation, increasing strikes, high mortgage rates and rising taxes, you’d be forgiven for thinking that the growth plan isn’t working for much of the UK landlord and business community.

Mortgages

2023 continues to see fewer mortgage products available, and buy to let mortgages are now more expensive than before.

Many landlords will face a large increase in mortgage payments, and landlords with borrowings should urgently review when their fixed rate period ends.

Buy-to-let lenders have amended their lending criteria, meaning that a property will need to generate greater rental income than previously in order to demonstrate that mortgage and other financial commitments will be met.

This means that if you are about to re-mortgage or purchase a buy-to-let property, you should consider your ratio of deposit, equity and mortgage needs for the property early in the process.

Rates have slightly dropped since Jeremy Hunt became Chancellor. His changes to the original mini-budget and growth plan, have restored some market confidence, and interest rates may begin to fall in 2023.

Stamp duty

A significant change for Landlords is the changes in the stamp duty regime. From 23rd September 2022, the Government increased the threshold above which Stamp Duty Land Tax (SDLT) must be paid on the purchase of residential properties in England and Northern Ireland from £125,000 to £250,000.

In addition, from 23rd September 2022, the threshold at which first- time buyers begin to pay residential SDLT will increase from £300,000 to £425,000, and the maximum value of a property on which first-time buyers’ relief can be claimed will also increase, from £500,000 to £625,000.

These changes may stimulate the property market, keep prices high and encourage more first-time buyers to seek to buy property instead of rent property.

However, there is no change for the stamp position for limited companies, with many landlords operating a limited company to purchase buy-to-let property to rent out.

Energy Bills Discount Scheme

The Energy Bills Discount Scheme will run for 12 months from 1 April 2023 to 31 March 2024.

This scheme replaces the Energy Bill Relief Scheme which supported businesses and organisations between 1 October 2022 and 31 March 2023.

If your tenants pay their own energy bills, then you wont be affected by this scheme as your tenants will receive the discount.

If you charge your tenants at the market rate based on their energy usage, you must pass on the entire discount within 30 days.

If you protect tenants from energy price increases, you may be able to keep some of the discount. If tenants pay 50% market rates on the energy bill, you can just pass on 50% of the discount. If your tenants pay for bills inclusive of their rent, and their rent hasn’t increased, landlords are entitled to keep 100% of the discount.

Corporation Tax

Another significant hit on landlord profits if you are running your property portfolio as a limited company is the corporation tax rate rises announced.

The corporation tax rate will increase to 25% from 1 April 2023, affecting companies with profits of £250,000 and over. The legislation that provided for this increase also sets out that small companies with profits up to £50,000 will continue to pay corporation tax at 19%, with profits between these two figures being subject to a tapered rate.

Dividend Tax

Other changes to come in 2023 include the reduction in the nil rate band for dividend tax. The change will reduce the amount charged at the nil rate from £2,000 to £1,000 from 6 April 2023 and then to £500 from 6 April 2024.

The rates of dividend tax will remain the same.

Capital Gains Tax (CGT)

From April 2023, landlords selling a property will be required to pay thousands of pounds more in capital gains tax (CGT), as a result of the tax changes announced in the recent Autumn Statement.

Changes to the Capital Gains Tax threshold will see the current annual exempt amount go from £12,300 to £6,000 from April 2023. It will then be reduced to only £3,000 from April 2024.

Income tax

Personal Allowance

Usually, the Personal Allowance goes up each year to reflect inflation, however, the help Chancellor froze the Personal Allowance at the 2021/22 level – initially for five years until 2026, which was extended to 2027/8 in last November’s Autumn Statement. This means that over the next few years, as the cost of living rises through inflation, the real-world value of your tax-free allowance will continue to fall.

Top rate threshold reduction

From April, the additional rate tax threshold is dropping to £125,140 and earnings over that level will be taxed at 45p. So those earning over £150,000 will pay 5p more in tax on £24,861 and see their tax bill rise by £1,243.

Tips for landlords

Here at dns accountants, our team have pulled together their top tips for landlords to help you to remain tax efficient, profitable and to guide you during these difficult times.

Mortgage payments

Mortgage rates have risen significantly, reducing the profitability of buy-to-let businesses for those with mortgages. It will affect many more as fixed rate deals come to an end. For new investors, it makes it more difficult to raise finance for mortgaged purchases.

Buy-to-let mortgage lending criteria are being changed by lenders in light of recent market conditions. Lenders will even more closely review the revenue you are looking to generate from renting a property before loaning the money in order to ensure mortgage payments will be met.

The level of deposit or equity that is available to you will become ever more important to help you to reduce monthly mortgage payments and rates.

Many landlords will already have or be soon facing significant increases in mortgage payments. Landlords that currently have mortgage borrowings with fixed rate periods, should urgently review their mortgage deals and begin looking at alternative deals.

Selling up

We’ve already seen many landlords sell up and leave the buy-to-let market as UK house prices rise, monthly mortgage payments increase and government policies increase legislation in the buy-to-let market. If this is something you are considering, then there may be added impetus to sell up before April 2023. In April 2023 the capital gains tax (CGT) allowance drops from £12,300 to £6,000.

This decrease in the CGT allowance and the removal of Section 21, means that if you were already considering selling up then there is even more incentive to do it now.

New landlords

But it’s not all doom and gloom. Some of the changes made or anticipated from government does mean that being a profitable landlord is getting harder, however this shouldn’t discourage people from entering the market.

For new landlords or people considering entering the landlord market, there are still potentially opportunities to be taken and tax incentives to be used.

Demand for rental property remains high as fewer people remain in the buy-to-let property market. Housing market forecasts are predicting a mixed year in 2023. House prices are predicted to fall or stagnate during a recession, meaning there may be some good bargains to be had on property purchase.

Buy-to-let can still offer a competitive return compared to other investments if you can navigate the regulations, seek professional advice and you are willing to manage your portfolio and property business carefully.

2023 Rental Reform Bill

2023 isn’t looking much more positive with the Renters Reform Bill due to be on the statute books at some point in 2023. This bill contains significant changes for landlords including changes in areas such as:

Abolishing Section 21

• Rights for tenants renting with pets, and the right to redecorate.
• A new private renter’s Ombudsman.
• A legally binding Decent Homes Standard (DHS).
• An end to rent review clauses and rent repayments orders for below standard rentals.
• Doubling rent increase notices and more powers for tenants to challenge increases.
• A new national online Property Portal for landlords and tenants.
• Extending grounds for repossession on Section 8 and streamlining court processes.
• Stronger powers for councils to tackle rogue landlords.
• An end to fixed term assured shorthold tenancy agreements.
• Banning blanket bans on tenants on benefits – ‘No DSS’ ads.
• Making it easier for landlords to remove tenants for anti-social behaviour.

Conclusion

UK economic growth looks better than originally predicted in the coming years. According to the chancellors OBR data, the UKs economic output is still to fall by 0.2% in 2023, but the economy will grow each year after that until 2027.

For landlords that are able to survive the negative impacts of high inflation, high mortgage rates and the cost of living crisis, people’s ability to save the necessary deposits to buy property undoubtedly become harder and higher mortgage interest rates, will ensure there is still demand for rental properties into the future. Higher mortgage interest rates means that renting can still be a more cost-effective solution to many young people.

There is no doubt we are operating in a difficult economic climate and will continue to do so. But often challenging times also create opportunity. For landlords that operate their businesses professionally, adhere to regulations and invest wisely, there is still an opportunity to run a profitable rental business.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.