For landlord clients who have been keen to diversify portfolios in recent years, this month’s Budget might not have been anything to write home about, given it took away some incentives that might have made that diversification decision somewhat easier.
You will no doubt have seen, for example, that multiple dwellings stamp duty relief is to be abolished from 1st June this year, taking away the relief that has been available to those landlords buying two or more dwellings in a single, or linked, transaction.
This relief allowed landlords purchasing to calculate the tax payable based on the average value of the dwellings rather than the aggregate value, but that won’t be the case from the start of June this year.
While this may not have been a common occurrence, it will certainly have been utilised by landlord clients seeking to add multiple properties to a portfolio, perhaps within a block, or indeed via a new-build development.
At the same time, we’ve seen a sizeable diversification from landlords —particularly, of course, in tourist areas of the UK. These landlords have moved properties from more standard longer-term tenancies to holiday lets, in order to take advantage of a greater demand in holidaying in this country, but also clearly in terms of the growth of AirBnB ‘culture’.
The government has decided to act in this area, arguing that large numbers of properties are being lost from the local PRS, making it more difficult for those from the area to rent out a property for the long term. It has therefore decided to get rid of the furnished holiday lettings tax regime.
Therefore, from April 2025 – a longer burn in some sense but still only just over a year away – interest will not be able to be deducted from rental income; instead, relief will be provided as a 20% tax credit from the landlord’s tax liability. For higher-rate taxpayers it means the tax relief interest deduction drops to 20%.
We’ve, of course, been here before in a wider BTL sense with the government doing the same for other rental properties held by individuals — hence the move to limited company status for many — and, of course, we’ve also had the 3% extra stamp duty surcharge for the purchase of additional property in place for nearly eight years come 1st April.
However, as mentioned, this hasn’t stopped large numbers of landlords from continuing to seek additions to portfolios.Instead, they may start seeking to build a diversified portfolio which delivers higher rental yields.
One area which might continue to see greater levels of landlord interest for this purpose is the MUFB, particularly if there is an opportunity to create an MUFB by buying a freehold property and splitting it into different units. Or indeed buying a property already of this type.
We suspect advisers are likely to be seeing more of this type of activity from landlords going forward, not least of course because of the strong demand that exists within the PRS from tenants and the fact that, by doing this, they are able to offer two properties for let rather than just one.
Diversification of this type is on the mind of many portfolio players and given they will see incentives taken away in terms of both multiple dwellings stamp duty and furnished holiday lets, they may well be looking at other areas which can help them deliver the improved yield they need, particularly in a higher interest rate environment.
Supporting this type of landlord with competitive mortgage products, particularly when it allows them to exit from more expensive short-term financing, should be a crucial part of your adviser toolkit, and we are keen to speak to the adviser community to help them outline the opportunity this provides to all.
