How the budget could effect the Buy to Let market

1. Potential Changes to Mortgage Interest Relief

One area the Chancellor might target is mortgage interest relief. Since the phased reduction of mortgage interest relief began in 2017, landlords have seen their tax bills rise, with many unable to deduct all mortgage interest from rental income before paying tax. If the budget includes further reductions or even complete removal of any remaining deductions, it could make BTL less profitable for landlords with high loan-to-value (LTV) mortgages.

This would likely drive some landlords out of the market, reducing rental property supply and potentially increasing rents. Conversely, if mortgage interest relief were partially reinstated or if other tax deductions were introduced to help BTL owners manage interest rate rises, landlords might see improved profitability, stabilising rent levels and encouraging further investment.

2. Possible Adjustments to Capital Gains Tax (CGT)

Capital Gains Tax is always an area of interest for BTL investors, especially as the government seeks to generate additional revenue. If the Chancellor chooses to increase CGT rates or lower the annual tax-free allowance for landlords selling BTL properties, it could deter landlords from selling, tightening the rental supply and pushing rents higher.

Alternatively, CGT incentives for landlords who sell to first-time buyers or long-term tenants could encourage sales, making more properties available for homeownership. This could ease some of the upward pressure on house prices and help meet the housing demand among first-time buyers, though it would also reduce the rental housing stock.

3. Revisions to Stamp Duty Land Tax (SDLT)

The Stamp Duty Land Tax (SDLT) surcharge for BTL and additional property purchases has been a significant cost for landlords. In the upcoming budget, the Chancellor might adjust this surcharge, either increasing it to discourage BTL investment or reducing it to stimulate the sector.

An increase in SDLT could push new landlords out of the market, making it harder for aspiring landlords to enter and potentially reducing competition in popular rental areas. A reduction, on the other hand, might encourage investment in the BTL sector, expanding rental supply and providing more housing options for tenants. Any adjustment will likely have an immediate effect on BTL market activity, influencing both supply and demand dynamics.

4. Increased Regulatory and Energy Efficiency Standards

Sustainability and energy efficiency are high on the government’s agenda, and BTL properties are under scrutiny to meet new standards. The budget may introduce grants, loans, or tax credits to help landlords make necessary upgrades. If so, landlords could find it more affordable to invest in energy-efficient improvements, boosting property value and appeal.

However, if the budget imposes additional energy efficiency mandates without financial support, some landlords might find it too costly to upgrade older properties and could choose to sell instead. This would reduce the rental housing supply and potentially contribute to higher rents. The budget’s approach to sustainability in housing could therefore have a profound impact on the affordability and quality of the BTL market.

5. Rent Control and Tenant Protection Policies

With affordability in focus, the budget could introduce measures to support tenants, such as incentives for landlords to keep rents at reasonable levels or direct financial support for tenants struggling with high rent. If rent controls are proposed, this could lead to fewer landlords entering the market or cause current landlords to exit, particularly in high-rent areas where restrictions would impact profit margins.

On the other hand, financial incentives for landlords who voluntarily maintain affordable rents or longer tenancy agreements could stabilize the rental market and encourage good landlord practices without imposing strict regulations.

6. Impact of Interest Rate Policies on BTL Mortgages

With rising interest rates, landlords with variable or adjustable-rate mortgages have faced increased monthly costs. Although interest rate decisions fall outside the Chancellor’s budget, fiscal policies aimed at easing financial pressure could indirectly impact landlords’ ability to manage rising costs. For instance, any direct or indirect intervention in the mortgage sector, such as tax relief on interest or incentives for lenders to offer fixed-rate mortgages, could alleviate some of these pressures on landlords.

If no measures are taken to assist landlords facing higher mortgage rates, some may decide to pass costs onto tenants or sell properties to reduce liabilities. This could have mixed effects: increased tenant expenses in the short term or a reduction in rental supply as properties are sold.

Conclusion

The Chancellor’s budget has the potential to bring major changes to the BTL market, impacting both landlords and tenants. Changes in tax relief, CGT, SDLT, sustainability incentives, and tenant protections could all influence how attractive the BTL market remains for current and prospective landlords. With rising costs already pressuring landlords, the budget’s approach to these issues will likely shape the direction of the BTL sector, influencing supply, affordability, and investment.

BTL investors, landlords, and tenants alike should pay close attention to these fiscal changes. Budgetary policies will offer a roadmap for future BTL dynamics, determining whether the market continues to thrive or faces significant headwinds.