“The only reason I am a landlord is there is no better investment,” said Stephen Smith, a self-employed product designer from Winchester. “Thirty years ago, if you had a chunk of money, you could put it in a pension fund with the expectation of a good return but these days that is not so. Annuity rates are very low, so it's a more attractive proposition to buy a property than a pension. It will probably grow in value and still be part of your estate when you die unlike (some) pensions.”

Smith bought his first rental property in 2009, a two-bedroom terraced house in Eastleigh and worked hard to pay off the mortgage. He went on to buy two flats in leafy Chandler’s Ford in 2020 and 2022. Despite the changes that landlords have faced, he has no immediate plans to sell up. “There is nothing I know of that is a safer investment and gives a better return,” he explained.

Higher tax bills

Landlords pay an additional three percentage points in stamp duty which makes it more expensive to buy homes for rent.  The surcharge adds £9,000 to a £300,000 property, putting the total stamp duty bill at £11,500, for instance. “The extra stamp duty is a big chunk of money but in the long-term it’s not so great,” said Smith, adding he had invested in properties at the lower end of the scale, so forked out less stamp duty.

Landlords can no longer claim as much tax relief on their mortgage interest. Previously, landlords used to be able to deduct borrowing costs and some property management costs from their rental income, but government clamped down on what some saw as excessive tax privileges in 2020. Now they must declare their gross rental income and then get 20% tax relief, meaning most landlords now pay more tax, eating into profits. Some have been tipped into higher rate tax bands.

Landlords can still deduct allowable expenses before their taxable income is calculated, including bills such as council tax, energy and water if they are included in the rent.

There is also the option for professional landlords to reduce their tax bill by owning properties through a limited company and so pay corporation tax at 25% instead of income tax.

Holiday lets have some tax advantages. Perhaps the biggest difference in tax is that the full mortgage interest can be deducted from the profits of furnished holiday lets, though it’s now restricted to the basic rate of income tax (20%). When selling holiday lets, some capital gains tax reliefs are available, too.

Tougher EPC rules

Landlords are facing bills of thousands of pounds to upgrade cold and draughty properties. Rental properties will need a C rating on their Energy Performance Certificates (EPCs), up from the current requirement of E, from 2025. Currently the average rating in England and Wales is D. The most common buy-to-let property is a Victorian terrace and 23% of private rental housing was built before 1919, according to the English Housing Survey. Unsurprisingly, many rental properties have lower than average EPC ratings, meaning they will need improvements.

The tougher rules on EPCs are part of the government’s plans to reach net carbon zero by 2050. Under the bill, which is going through Parliament, all new tenancies will have to have an EPC rating of at least C by December 2025 and all rental properties must meet that standard by 2028. Landlords would be expected to fit insulation, new boilers, heat pumps, double or triple glazing and solar panels to upgrade properties.

“From E to C is so tough. I’m thinking of selling,” said one landlord who owns three flats in Basingstoke and Winchester. Property website Rightmove found that one-in-five landlords said they would sell up before 2025 rather than pay large sums to meet tougher energy efficiency standards.

Smith reckons the government will have to push back the deadline. “There’s not a lot you can do if it’s a flat in terms of messing around with the structure of the building. You could lobby the leaseholder or property management company to take steps but for people who don’t let their flats why would they want to be saddled with the cost of upgrading the block?” He added: ““I know government wants us all to use less energy and be thoroughly insulated but that’s just not possible for some buildings. What will happen? Will tenants be evicted from rental flats that aren’t up to scratch and those properties made unsaleable?”

But its “not all doom and gloom,” according to Helen Jollands, property valuer for Linley and Simpson n York, said: “The majority of landlords are on board with it and making improvements now so they can be ahead of the change. I think it’s going to be better for landlords, tenants and the environment.” Landlords will benefit if properties are cheaper to run because “quality tenants” will stay longer, said the estate agent. What’s more Rightmove estimates that improving a property from an F to a C rating could add 16% to its value.

Soaring mortgage bills

Mortgage rates for buy-to-let investors are now rising sharply. The Bank of England hiked its base rate 10 times since last December, pushing mortgage costs up. The average cost of a new two-year buy-to-let fixed has doubled from 2.9% in December 2021 to 5.95% at the start of February this year (2023), adding about £2,000 a year to annual repayments on average, according to the data firm MoneyFacts,

Like homeowners, most buy-to-let landlords have two to five-year fixed rate mortgages. When they refinance, landlords are likely to see deals at much higher rates than previously. The Bank of England warned in December that a fifth of landlords with a mortgage would face increases of more than £300.  Landlords are looking to raise rents to cover the increased costs – or selling up. Fewer rental property means more competition, further pushing rents up, said Jollands.

Regulatory burden increased

The regulatory burden has increased, especially for houses in multiple occupation (HMOs). Every HMO must have yearly gas safety certificates, ensure electrics are checked every five years, fire safety measures in place including working smoke alarms and adequate facilities for cooking and washing.  And this year Michael Gove, the secretary of state for levelling up, housing and communities, plans to provide better protection for renters, including scrapping Section 21 “no fault” evictions. Meanwhile rent regulation was introduced in Scotland last year, limiting rent rises to three per cent.

Some property analysts predict small-scale landlords could be on their way out, replaced by professional ones and “build to rent” developers. But Jollands disagrees: “I am seeing some selling-up, but the majority are coping. It tends to be single unit, accidental landlords who want to sell because mortgages have gone up and the tax benefits have dwindled.” First-time landlords with the finances in place are still looking to buy as well as those with multiple properties though the latter may sell one or two dwellings to pay bigger tax bills, said Jollands.

Most landlords are adjusting to the harder market conditions and increasing rents to cover their costs.“Every time government squeezes landlords, the tenants pay for it,” warned Jollands.