Interest rates: where does this leave landlords?

In recent months, inflationary pressures exacerbated by the September 2022 so called “mini-budget” caused havoc in the mortgage market. For a while experts predicted the Bank of England base rate would be at least 6% in 2023 but current predictions of a peak at 4.5% now look more likely.

Just very recently a major high street lender introduced a fixed 3.99% interest rate on a five-year mortgage, which is the first sub-4% product on the market since October.

Does this mean that landlords with mortgages can breathe a sigh of relief?

Not exactly. Many landlords coming to the end of fixed rate mortgages in 2023 face significantly higher mortgage rates than before.

The gloom for landlords is not just limited to mortgage rates: landlords who hold property personally no longer receive full tax relief for mortgage interest unlike other businesses, and many landlords face significant bills bringing properties up to new Energy Performance standards by 2025.

What can be done?

Ignoring these issues is a dangerous approach. Our specialists recommend acting on these issues now, so what should you do?

Following a forecast of your profits and tax for the coming years, it may be the best course of action to:

1. Take no action and weather the storm – but safe in the knowledge that your rental business will continue to be a good investment.
2. Pivot your target market to holiday letting – holiday lets which meet certain conditions can benefit from income, capital gains and inheritance tax reliefs. These reliefs are usually reserved for trading activities rather than property businesses.
3. Transfer beneficial ownership of the property, or form a partnership with family members – which may reduce effective tax rates, or enhance access to income reliefs.
4. Transfer beneficial ownership to a company – larger landlords are increasingly turning to companies as a way to reduce tax rates; corporate tax will shortly be 19% / 25% whereas the top rate of income tax is 45%. Property rental companies also benefit from full tax relief for mortgage interest.
5. Sell properties and invest the proceeds in other assets – this may be a sensible course of action as many landlords are expected to make losses over the coming years.

Changing your business or transferring ownership of assets can trigger further tax charges and so these options should be considered carefully.

How can we help?

We advise that you seek guidance and expert advice from financial, tax and legal professionals on these matters.

If you would like to discuss your own circumstances, please get in touch with Tax Manager Peter Sands (petersands@lubbockfine.co.uk) or your usual Lubbock Fine contact