What are the biggest challenges for buy-to-let landlords?

The private rented sector provides ample opportunities for buy-to-let landlords, but there are still certain hurdles that all investors should be aware of.

Property investment in the UK remains one of the most popular asset classes, with buy-to-let landlords reaping the rewards through their rental yields and capital gains, while also providing around 4.6 million households – around 19% of the total – with somewhere to live.

The sector has been the target of some significant reforms in recent years, and this has come hand in hand with reports of buy-to-let landlords leaving the market. However, a new survey suggests this is likely to have been exaggerated, and does not reflect the true position of many in the sector.

In research conducted by Octane Capital, a poll of buy-to-let landlords found that, in reality, only 8% of those surveyed had reduced the size of their portfolio over the past year.

This backs up findings by several other reports, which actually present a picture of optimism among those operating in the sector. However, that is not to say the industry is not without its challenges, and Octane’s study looked at this in more depth.

Calls for capital gains tax reversal

When buy-to-let landlords sell an investment property for a profit, they are normally required to pay capital gains tax (CGT) on this profit.

The tax has been subject to a few changes over recent years, though, including a new rule brought in in April 2020 that meant all landlords had to report the sale of a property and pay any CGT they owe within 30 days of the sale.

More recently, Jeremy Hunt’s autumn budget revealed that the tax-free allowance for CGT would be reduced from £12,300 to £6,000 in April 2023. It will then be reduced from £6,000 to £3,000 in April 2024, meaning more property sales will be subject to the tax.

According to Octane’s survey, two fifths of buy-to-let landlords want the government to reverse this change, even though the majority intend to continue to operate in the sector in spite of the new rates.

A proposed ban on Section 21 evictions, under the Renters Reform Bill, was also high on the agenda as a challenge for those surveyed, alongside required improvements to EPC ratings in rental properties.

Higher running costs for buy-to-let landlords

It is impossible to ignore the fact that the country’s cost of living crisis is affecting the majority of households across the UK, and this is the case for both buy-to-let landlords and tenants, too.

Unsurprisingly, this was noted as the next biggest issue for many property investors, who are concerned about how higher maintenance costs and energy bills will affect their investments. Those with newer, more modern and energy efficient properties may avoid major challenges in this area, though.

Day-to-day running costs were also seen as a challenging factor, while interest rate rises affecting the cost of borrowing were on the radar for many respondents, too. Thankfully, after a period of continual increases, the mortgage market has remained relatively stable in recent weeks, with some falls in fixed rates.

Jonathan Samuels, CEO of Octane Capital, said: “It appears as though the exodus of landlords from the rental sector has been somewhat overexaggerated with just a small proportion opting to reduce the size of their portfolio in 2022.

“That said, while we’ve seen a degree of stability return following a shambolic mini-budget last September, many buy-to-let investors remain cautious about the year ahead.

“This caution is likely to prevent them from investing further until a greater degree of certainty returns, although we must also tip our hats to the government in this respect, as their consistent attack on the sector remains the number one concern.”

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