In the wake of the recent budget announcement, property acquisitions by landlords are projected to drop below 100,000 annually for the first time in ten years, with significant implications for the rental market. An estate agency has even forecast that next year, the number of landlords selling their properties may double compared to those buying.

Chancellor Rachel Reeves delivered a substantial change for landlords and second-home owners during her inaugural budget, revealing a 2 percentage point increase in stamp duty land tax (SDLT) on second homes and investment properties. As a result, these buyers will now be subjected to an extra 5 percent levy on purchases, an increase from the previous 3 percent, in addition to the standard stamp duty rate.

This new policy took effect immediately at midnight on Thursday, leaving little time for last-minute transactions to finalize. Reeves stated that this action aims to “support over 130,000 more transactions from individuals purchasing their first home or relocating in the next five years.”

However, experts warn that this decision could lead to unforeseen outcomes. By discouraging landlords from acquiring additional properties, the rental market could face heightened pressure, which has already seen average price hikes of 6.2 percent in the year leading to January 2024. Currently, the average monthly rent stands at £1,213 outside London and £2,148 within the capital, according to data from the property portal Zoopla.

Lucian Cook from Savills commented, “Landlords may have briefly felt relieved by the budget when they learned there would not be an increase in capital gains tax. However, this relief dissipated quickly upon hearing about the 2 percent stamp duty hike.”

Additional stamp duty increases are anticipated for all buyers starting in April. The threshold for the tax on residential purchases was raised from £125,000 to £250,000 under former Prime Minister Liz Truss in September 2022, with first-time buyer thresholds shifting from £300,000 to £425,000. These thresholds are set to revert on March 31. Consequently, landlords will face a 5 percent charge on properties valued up to £125,000, 8 percent on values between £125,001 and £250,000, and 10 percent on amounts exceeding £250,000 starting in April.

Although the stamp duty adjustment is seen as a setback, some aspects of Reeves’ budget provided a silver lining for landlords. A feared increase in capital gains tax did not materialize, with current rates maintained at 18 percent for basic rate taxpayers and 24 percent for higher-rate taxpayers, giving landlords some reprieve. This means they can retain their properties without incurring additional penalties when the time comes to sell. Nevertheless, the stamp duty rise may deter new landlords from entering the market and dissuade current landlords from selling their rental properties due to the substantial costs involved in re-entering the market in the future.

Market Contraction

The trend of landlords purchasing fewer homes has been evident since 2015, following the introduction of a 3 percent stamp duty surcharge on second homes by Chancellor George Osborne. In that year, landlords acquired over 188,000 properties, which fell to 127,000 by 2019. Since then, landlords have been selling rental properties at a faster rate than acquiring new ones, leading to a shrinking market.

Although there was a slight uptick in property purchases by landlords in 2021 and 2022 during the pandemic’s stamp duty holiday, the overall downward trajectory resumed in the following year. The estate agent Hamptons predicts a further decline in the coming year, estimating that purchases could plummet to 84,000 while sales rise to 156,000.

Tax relief for second homes has also diminished, reducing the attractiveness of buy-to-lets. Some landlords have attempted to circumvent the issues by acquiring properties under a limited company, though this does not exempt them from the added stamp duty levies.

According to Gary Hall from Knight Frank, “This will hinder the already slow growth of rental property availability in a way that will tighten supply for tenants.”

For landlords contemplating property acquisitions in the foreseeable future, the abrupt implementation of this policy could serve as a shock. Hall noted, “This may prompt buyers to reassess their financial strategies. Some might renegotiate prices, while others, comfortable with what they’ve agreed to pay, may not wish to lose the property.”

Smaller landlords are expected to bear the brunt of these changes, with 43 percent of landlords in England owning just a single property, making up 20 percent of all tenancies. Professionals with over 100 properties are quite rare, representing only 0.1 percent of all landlords.

Demand Versus Supply

Typically, landlords in the UK are male, around 58 years old, and have likely invested in a terraced home in Birmingham about 12 years ago that is now valued at £280,000. They planned to rent it out to supplement their retirement income, despite still having a mortgage that constitutes half the property’s value, benefiting from additional income that allows for early retirement.

Birmingham currently has the highest number of privately rented properties compared to any other local authority in England. In regions with a high concentration of second properties, such as Leeds, the challenges presented by this budget could become particularly pronounced.

Cook asserted, “The announcement poses significant difficulties for smaller, less experienced buy-to-let investors. Moreover, it may dampen the willingness of larger, wealthier landlords, who have become increasingly vital in providing rental accommodations.”

The ongoing lack of rental supply, which has driven prices upward for many years, is likely to be further entrenched due to these new developments, Cook added.

The Office for Budget Responsibility (OBR) has projected a 25 percent reduction in second home purchases by the end of 2025 following this surcharge. Consequently, the portion of homes acquired by landlords is expected to decrease from 10 percent to approximately 7 or 8 percent.

However, this decrease does not necessarily bode well for first-time buyers, as rising rents will absorb a larger share of their income, which is already being strained by the cost of living crisis alongside elevated rental prices. Furthermore, for those able to save enough for a deposit, the reduced selection of properties could be a hurdle.

Cook indicated that if the Bank of England opts to lower interest rates, it could offer a more favorable outlook for the property market.

“This situation is certainly not catastrophic for landlords in the short term, but it isn’t advantageous either,” said Cook. “It’s disheartening, yet we must persevere.”

Landlords Reassessing Their Options

Michael Foldvari expressed relief at the absence of an increase in capital gains tax on property sales but is now contemplating selling his investment properties due to the stamp duty increase.

At 48, Foldvari, who works as an estate agent, owns four buy-to-let properties in Reading—comprising three flats and a three-bedroom terrace currently for sale as it requires renovations.

With the newly imposed 5 percent stamp duty surcharge, Foldvari is unlikely to expand his property portfolio. He is currently facing losses from increased mortgage rates and the removal of significant tax reliefs that allowed landlords to deduct mortgage interest from their taxable profits.

“The challenges have been mounting over the past few years,” Foldvari stated. “For three of my mortgaged properties, I’m essentially subsidizing my tenants by around £6,000 to £8,000 annually. In one instance, my mortgage payments have multiplied fourfold.”

Foldvari is now weighing options, including transferring ownership of the properties to his three children or potentially exiting the rental market entirely.

Additional reporting by George Nixon