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The Rising Costs of Letting

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If you are considering becoming a landlord, now might be the right time, but be weary about tax changes that have recently come into force.

Despite the changing political landscape it seems that London, the largest city currently in EU, is still in great demand. The first quarter of 2017 has seen positive activity in the prime London property market, with a little or no reduction in rental prices along with robust levels of demand, meaning the coming year is looking good for existing and prospective landlords.

So, if you are considering becoming a landlord, now might be the time. However, if there is a cloud on the horizon, and sadly there usually is, it takes the shape of the tax changes that, announced in 2015, have now come into force from this April. From the 1st, the changes will be phased in over the next four-years, and the headline is that the Income Tax relief landlords can get on residential property finance costs will be restricted to the basic rate. In short this means that you will no longer be able to offset the full cost of financial costs, such as mortgage interest, against tax, meaning your tax bill will likely increase and letting will become less profitable.

This year, the maximum percentage of finance costs deductible from rental income will be 75%, while the percentage of basic rate tax reduction will be 25%. So, with this tax reduction decreasing, what will it cost you to buy and rent a home over the next four years?



Working on figures for a £600,000 two bedroom prime property in Central London today, you’re looking at forking out almost £200k in initial purchase costs, just to get in the game. This includes a £150,000 deposit, £4,250 in mortgage product and legal fees, £20,000 in stamp duty plus an additional £18,000 in extra stamp duty, making £38,000 in total. That’s the additional 3% stamp duty payable for those buying second homes that came into force April last year. In total it’s a decent amount, but is it one that will pay off in the long run?

Well, according to recent figures, there’s certainly going to be a market for your property. A new report from the Mayor of London, creatively titled ‘Housing in London: 2017’ asserts that private renting in the capital will match the levels of homeownership in London by 2025. In just eight years, it expects both private renting and homeownership to each account for 40% of all London households, while social renting will make up just 20%. So as the capital grows, more and more people will enter into rental accommodation, mainly due to the unachievable cost of owning.

It seems London is moving towards a market that more closely mirrors that of cities in continental Europe such as Berlin and Amsterdam, where young professionals and families rent indefinitely. Generational shifts affect property markets, and for some people who make Central London their home, but perhaps sit just under a threshold needed to buy a property in their preferred area, long term renting isn’t the apocalyptic scenario some older generations might think. However this will continue to grow into a larger and larger issue as low wages and high proportional rental costs relative to income can stymie available spending in other areas of the economy, whilst not least leave many people in a difficult position to save.

If the rental market grows to the sizes predicted then it is likely that standards and demands will need to rise. Without getting too political, more and more of the voting population will become tenants, and that will drive subsequent government policies. Tenants’ demands rise with prices, and it will be the responsibility of landlords to provide better homes. And, of course, this will also benefit the landlords as they’ll be able to charge more. However it is likely the government will have a very tricky road ahead, balancing the needs of a burgeoning rental sector whilst incentivising landlords as best as is possible to continue to provide a necessary service. It could be, as this article goes someway to help explain, that the economy of letting for small landlords just won’t add up anymore. Perhaps future rentals will be an economy that only works at scale, and that may be provided for through larger companies that are also easier to police, especially regarding legislation. Certainly the private rental sector is regularly talked about in, shall we say, not such a positive light when it comes to government policy and the news. This could suggest that there may be a larger agenda to move generally in this direction.

That said, a recent report predicts capital growth in property in 2019-2020 of up to 7% per year, so putting your money into property should remain a lucrative business. Hence, the market is still strong as ever for private landlords. Rental returns in London have always been lower than most of the UK and it seems that this may reduce further with added levies. Of course though, London property is one of the fastest growing assets available and is also considered one of the safest. Couple that with healthy demand from tenants and it’s likely that even despite this new legislation coming into force we will see a continued growth in the sector for some time to come.

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