There is a lot of hype on social media about an exodus of landlords from the UK property market. People argue rising costs and higher interest rates magnify Section 24 and that will lead to an exodus of landlords.
The reality is this just is not going to happen. If anything, it makes the property market less fair. It will lead to an adjustment in the type of landlords and an increase in international landlords. Here’s why.
Section 24
Section 24 was introduced in April 2017. It changed tax laws for landlords who owned property in their own name. These landlords can no longer claim mortgage interest, or any other property finance, as tax deductible.
Instead, landlords are paying tax on their rental profits without deducting interest costs. Landlords can then claim tax relief on up to 20% of their interest expenses against their income tax liability.
What is the impact on landlords?
The impact on those landlords who own properties in their own name is huge. It creates the ridiculous scenario where a landlord can make a net loss and then be taxed on their loss.
Section 24 does not apply to companies
However, Section 24 does not apply to companies that buy property. They can claim 100% of their interest expenses and finance costs. They then pay corporation tax on their net income.
Impact of Section 24
There is no doubt Section 24 has a financially devastating impact on most people who own property in their own name. Perhaps except for offshore landlords who are less impacted by Section 24.
Most affected landlords have already sold
Whilst the impact of Section 24 is significant, it was introduced in 2017. All landlords were aware of the impact and they have had time to adjust by; lowering their leverage to lessen the impact, re-financing and locking-in long term rates or both.
However, many landlords simply sold up in 2021 and 2022. Taking advantage of favourable market conditions, they have sold at the top of the market cashed in and moved on.
What is the motivation of Landlords?
To explain why Section 24 will not impact new landlords, you need to think about the motivation of someone who buys residential investment property. I have worked with literally thousands of investors over the years.
The overwhelming majority of landlords bought property for one single reason. For long-term income when they retire. None had an immediate requirement for the income, they were already earning income from their job. Their intention to slowly build a property portfolio over time leveraging equity which was created.
Ultimately, their long-term objective was to reduce their debt. Either by paying it down over time or selling some of their portfolio to extinguish it.
Why is this important?
This is important because these investors can quite easily buy in a company. It puts this type of investor in a much better position if they in a company. Consider the following, scenarios.
UK investor paying UK PAYE tax
Consider, an investor who buys a rental property in the UK who is living and working in UK. Who uses a company to buy the property. They will pay a 3% SDLT surcharge and the 19% corporation tax on the net profit of their company.
If they retain all these profits within their company and use them to grow their portfolio to the point they retire, whenever that is. They can then use the retained and future profits to pay themselves dividends for which they will pay the following tax (assuming it is their only income).
They won’t pay any income tax on their first £12,570 in dividends ie. their tax free threshold. Then they will pay the following dividend taxes.
| Dividend Tax Rate | From | To | |
| Basic Rate | 8.75% | £2,000 | £37,500 |
| Higher Rate | 33.75% | £37,701 | £150,000 |
| Additional Rate | 39.35% | £150,000 + |
International Investors
An international investor will pay the same corporation taxes on the income above. However, assuming they are offshore they will pay no dividend tax in the UK. In addition, many won’t pay tax on their dividend income because foreign income is not taxed.
Unintended consequences
Section 24 will have unintended consequences too.
Offshore investors
Offshore investors have an obvious advantage over and above UK domiciled investors. This, combined with a weak pound mean they will likely leverage this to their own benefit.
Opaque structures
Driving landlords into company ownership structures means that many will create opaque structures. Many will look to create opaque structures which shield their tax liability and will ultimately mean they pay less tax than they would have if they simply held the property in their own name.
UK Landlords driven offshore
When UK landlords sell their property or look to increase the size of their portfolio, many will now look offshore. Rather than increasing the volume of rental stock in the UK they will do this in other countries. We have many conversations with landlords with large UK portfolios looking to acquire property in Australia and New Zealand. You can find our guides to investing in Australia, New Zealand and the UK here.
Once this capital goes offshore it is unlikely it will ever return. This cannot be good for the UK economy.
Rising rents
Landlords who have left the market will be replaced by those who purchase in a company. There will be a short-term shock to the housing market with limited rental property available. Those who cash up won’t buy immediately in a company name, they will wait for a market correction.
The impact of this is obvious, a lack of housing stock will have an immediate impact on rents.
Who benefits form a price correction?
People talk about a housing correction and drops in values of more than 30%. I think the likelihood of this happening is small. But if it did, who would benefit most? A house price correction of that magnitude would have huge knock on effects in the economy.
In this scenario, who will be best placed to buy property? Well-capitalised landlords or first time buyers worried about their income and job security.
Landlord’s aren’t going to switch to Bitcoin
As much as some people may dislike landlords the reality is they play a valuable role in the economy. Landlords buy property because they understand it, they know what they are dealing with, and they are conservative by nature. These investors will not switch to Bitcoin.
Section 24 and the coming recession won’t lead to an exodus of landlords. It will lead to a restructuring of landlords, with small investors leaving the market and being replaced by larger investors buying as a company.
