How Did the Mini Budget Affect the Buy-to-Let Market? How Have Landlords and Lenders Responded?

Written on 21 March 2023 by Nicholas Mendes

The Mini Budget has left its mark. Market conditions and uncertainty surrounding government fiscal policy and how the Bank of England would need to overcome the prospect of higher inflation meant markets had forecasted a base rate closer to 6% in 2023.

The good news is that following the Government's reshuffle, with Rishi and Hunt at the helm, markets have reacted well, resulting in SWAP rates coming down and lenders slowly reducing rates from the highs of September and October. Coinciding with this timeline of rate reductions, we have also seen lenders come back onto the market and ease their lending restrictions.

Although criteria have eased slightly, rates have not reduced as quickly as many landlords hoped which has impacted mortgage ICRs (interest cover ratios). This has resulted in landlords not being able to raise funds to either remortgage on a like-for-like basis or raise anything at all as lenders introduced minimum income requirements as part of their criteria to make lending more stringent. Consequently, landlords are restricted to the lender’s SVR or at the mercy of their existing lender’s product transfer rates.

How Has Lending Criteria Changed/What Does Lenders’ Stress Testing Involve?

Lenders assess affordability for buy-to-let mortgages by comparing gross rental incomes with interest payments via a measure called the interest coverage ratio or ICR.

As a result, if mortgage payments were to rise a landlord would have to raise the rent to be able to refinance on similar terms.

Banks require a minimum ICR of 125% for limited companies and basic rate taxpayers, and 145% for higher rate taxpayers.

Understanding the Tax Implications of Letting a Property: What Are the BTL Tax Rules that Landlords Should Know About for 2023?

There have been a few changes to Stamp Duty Land Tax, Capital Gains Tax and Income Tax that landlords should be aware of. Below you’ll find key rates to bear in mind.

Stamp Duty

When you buy a second home or a buy-to-let property, you pay Stamp Duty at the standard rates plus a 3% surcharge on each band.

Property Value	Standard SDLT Rate 23/09/22 - 31/03/25	SDLT Rate on Second Homes or Buy-to-Lets 23/09/22 - 31/03/25
Up to £250,000	0%	3%
£250,001 - £925,000	5%	8%
£925,001 - £1,500,000	10%	13%
From £1,500,001	12%	15%

Tax on Rental Income

Your Income Tax band determines the rate at which you’ll pay tax on rental income.

Income Tax Band	Taxable Income 2022 – 2023	Income Tax Rate 2022 - 2023	Taxable Income 2023 – 2024	Income Tax Rate 2023 - 2024
Personal Allowance	Up to £12,570	0%	Up to £12,570	0%
Basic Rate	£12,571 - £50,270	20%	£12,571 - £50,270	20%
Higher Rate	£50,271 - £150,000	40%	£50,271 - £125,139	40%
Additional Rate	£150,001 and above	45%	£125,140 and above	45%

Capital Gains Tax

Capital Gains Tax (CGT) is a UK tax you pay on the capital gain you earn from the sale of various chargeable assets, including property or land that’s not your main residence.

The Capital Gains Tax allowance on property for 2022 - 2023 is £12,300 and is set to reduce to £6,000 for 2023 - 2024 and then again to £3,000 for 2024 - 2025.

The reduction from 2023 - 2024 in the maximum capital gain before CGT is charged will likely affect some landlords.

Taxable Gains on Property 2022 - 2023	Capital Gains Tax Rate on Property 2022 - 2023	Taxable Gains on Property 2023 - 2024	Capital Gains Tax Rate on Property 2023 - 2024
Up to £12,300	0%	Up to £6,000	0%
£12,301 - £50,270	18%	£6,000 - £50,270	18%
£50,271 and above	28%	£50,271 and above	28%

You don’t pay Capital Gains Tax on property owned and sold by a limited company; you pay Corporation Tax which currently stands at 19% (2022 - 2023) and is due to rise to 25% from April 2023.

What Has Happened to the Buy-to-Let Mortgage Interest Tax Relief?

When the BTL market started seriously in 1996 it was treated for Income Tax purposes like any other business in that all legitimate expenses could be set off against income before arriving at a taxable profit. From 2017, for properties owned by one or more humans rather than a company, the proportion of interest costs which could be set off against rental income was steadily reduced. Now landlords only receive a 20% tax relief (tax credits) on mortgage interest payments, regardless of marginal tax rate.

Why Is This Relevant to Landlords Now?

As mortgage rates increase the impact of this change becomes even greater because a higher proportion of buy-to-let investors' costs are not tax deductible. This a double whammy for buy-to-let investors with a mortgage as not only do their costs increase but the proportion of these costs which can be offset against tax reduces.

What About Letting Relief?

Lettings relief was introduced to avoid penalising people who moved home and were unable to sell their previous home simultaneously with the new purchase. When introduced this relief allowed people up to 3 years to sell their previous home without having to pay any CGT on it but over the years the maximum period has been reduced and is now only 9 months. As well providing some benefit to anyone whose sale of their previous home is delayed beyond the purchase of their new home this relief provides some modest help to anyone doing a let to buy.

If a property which was previously a main residence is retained and let out lettings relief means that it is treated for CGT purposes as a main residence for an extra 9 months. If a property was a main residence for part of the period of ownership and let out for part any CGT is calculated on a time apportionment basis, regardless of when the capital gain occurred.

As an example, CGT for a property which is owned for 15 years and occupied for 10 years and 3 months as a main residence and then rented out for 4 years and 9 months before being sold would be calculated like this:

Main residence: 10.25 years
Letting relief: 0.75 years
Total 11 years
CGT would therefore be payable on 4/15 of any capital gain

What Type of Buy-to-Let Landlord Suits a Variable or Fixed Rate? How Can They Protect Against Future Hikes in the Market?

The privilege to choose between a fixed or variable rate product may be out of their hands for some landlords as lenders tend to stress over a 5 year fixed more favourably. Landlords as a result will be at the mercy of their existing lender and what product transfer rates are on offer.

There are lenders that are offering client lifetime trackers and 2 year trackers with no ERCs allowing for flexibility to switch to a more competitive fixed rate when the opportunity arises in the future.

Also, some lenders can do 100% DSCR – rather than stressing at 140% (higher rate taxpayers) or 125% (for limited company or basic rate taxpayers) – these lenders are offering product purely working on payrate.

Aside from Rent What Other Key Issues Should a Buy-to-Let Landlord Consider?

From 2025, all newly rented properties will be required to have an EPC rating of C or above. Currently properties only require an EPC rating of ‘E’ or above. Existing tenancies will have until 2028 to comply with the new rule changes.

The pressure on lenders from the Government is growing, so lenders will need to be looking to ensure that the homes they lend on our suitable. With most of the homes in the UK being an E or D rating, landlords will also have to consider any costs to improve potential properties.

What Are the Prospects for the BTL Market in 2023?

We expect mortgage rates will continue to be in a state of flux, despite fixed rates reducing slightly and swaps also reducing beginning of 2023.

Currently, tracker and discounted products remain cheaper than many fixed rate mortgage deals.

With base rate expected to peak at 4.25%, and recent economic analysis commentary revising forecasts that any base rate decrease is unlikely until 2024, those with multiple properties coming out of a fix in 2023 may find it prudent to diversify their portfolio product mix.

ICR calculations will continue to be a key issue for landlords, and it’s not a bad idea to look at ways to reduce your mortgage liability. For example, if you capacity for mortgage overpayments on your portfolio this will reduce the portfolio LTV which will allow you to access lower rates and minimise what you would pay back in the long term.

What Changes Can Lenders Make in the BTL Sector Within the Confines of Regulation to Get It Moving?

We have seen some lenders introduce higher lender arrangement fees in order to overcome the ICR limitations when it comes to assess borrowing. By increasing the arrangement fee, the lender can then offset a reduction in the fixed rate making the mortgage ICR more favourable. This allows the lender to still make a profit and landlord to borrow at a cheaper rate.

Secondly with EPC changes around the corner, it would be great to see lenders look to incentivise landlords with access to cheaper loans or for portfolio landlords reduced ICR calculations with portfolios C or above.

Category: Nicholas Mendes