Photographer: Matthew Lloyd/Bloomberg

London Landlord Home Sales Plummet as Taxes Slash Returns

Updated on
  • Proportion of homes bought by investors falls to 12 percent
  • Stamp duty increase, tax relief changes reduce landlord demand

Jennifer Pickford, a 39-year-old owner of four London rental properties, is not only avoiding purchasing more -- she’s considering selling the ones she has. She isn’t alone.

The proportion of homes bought to rent out in the capital tumbled after an additional 3 percent tax on second-home purchases was introduced in April 2016. Now landlords are facing a second hit with a reduction in tax relief for rental income introduced last month.

“If I thought stamp duty was bad, the tax relief issue really was the nail in the coffin,” Pickford, an accountant from Surrey, said in an interview. “It just makes the whole exercise unprofitable and pointless.”

The number of properties for rent in London jumped in the last year as landlords rushed to make purchases before the stamp-duty tax increase took effect and a slow sales market prompted more owners to offer their properties for lease instead. As a result, the average asking rent for homes in Greater London fell 4.2 percent in the first quarter from a year ago to 1,937 pounds ($2,490) a month, according to property website Rightmove Plc.

Homes bought to rent out in London dropped to 12 percent of the total in February from 20 percent a year earlier, according to data compiled by broker Hamptons International. In March 2016, a month before the higher stamp duty was introduced, landlords accounted for 29 percent.

“It’s tough now to be a private landlord unless you have a lot of equity to put down,” Tina Riches, a partner at law firm Smith & Williamson, said in a telephone interview. “Any high-rate taxpayer landlord whose mortgage interest is more than 75 percent of their rental income will see all of their returns erased by 2020.”

Under the changes, a landlord who pays 40 percent tax and has an annual rental income of 15,000 pounds will see profits fall 86 percent to 360 pounds in 2020 compared with last year, according to mortgage broker John Charcol. That’s based on mortgage-interest payments of 10,800 pounds a year.

Stagnating Values

“Before, prices were rising fast enough to cover extra taxes and you could still make money,” Spencer West, who owns two London properties, said in an interview. “Now, they have stagnated and there’s no profit to be made with mortgage repayments, repairs and extra taxes coming out.” West, a 39-year-old building materials company owner from the London borough of Havering, said he may sell his rental properties and reinvest in his pension plan.

London landlords pay the highest costs in the U.K. for running an investment property,  according to a report published this month by lender Kent Reliance. Investors in the capital pay an average of 6,535 pounds a year to maintain, insure and fees for a rental home compared to an average of 3,632 pounds for the U.K., the report shows. Those figures exclude home-loan payments.

Still, London landlords may have some reasons to stick it out. While price growth is slowing, values have jumped about 86 percent since 2009 and it now costs buyers 14.2 times their gross annual salary to purchase a London home, the highest level on record and more than double the rate for the U.K. as a whole, Hometrack data show. That may cause rents to rise in the longer term as people rent for longer.

“It’s no surprise that investors are now buying fewer rental properties in London and some are even leaving the market altogether,” Lucian Cook, head of residential research at Savills, said in a telephone interview. “The question is how long can that continue before you end up with not enough to fill the gap” and rents rise.

Pickford says higher rents probably won’t be enough to make her keep her properties.

“Even if rents rise after a blip, the prospect of an extra 100 pounds a month won’t cancel out the extra I will have to pay when the tax relief is fully phased out.” she said. “I may as well sell and put the money into another area with better returns.”

(Updates with rental home maintenance costs in ninth paragraph.)
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