What's in store for UK buy-to-let landlords in 2023?

There are some challenging things in store for landlords in 2023. Tighter regulations surrounding EPC ratings, high mortgage rates and the cost-of-living crisis are three factors used to predict declining returns for UK landlords - but this doesn't necessarily have to be the case.

What's changing for buy-to-let landlords in 2023?

Investment in UK buy-to-let properties in 2023 could be a lucrative opportunity for property owners, particularly those who can purchase outright cash. It's worth remembering that all investment opportunities come with unique challenges - markets routinely slump and grow back. For many landlords, it may be a case of riding out the storm before enjoying some relative calm.

Others, however, may be able to capitalise on the situation like never before. Despite any economic downturn, there is still unprecedented demand for UK buy-to-let properties. Demand for rental properties is outstripping supply, which means landlords will continue to have tenants looking for UK properties in 2023 and beyond. With the right investment strategy, there is no reason why landlords can't enjoy healthy returns this year.

What are the new rules for buy-to-let landlords in 2023 UK?

The new tax year begins in April and brings a host of reforms and trends which could impact property portfolio holders in the future. UK landlords and property investors should familiarise themselves with the following key points:

Capital Gains Tax

The government has proposed changes to the Capital Gains Tax (CGT) to reduce the deficit. They will decrease the CGT tax-free allowance from £12,300 to £6,000, expecting it to drop further in 2024. This decision has been criticised by landlords and UK buy-to-let investors, resulting in an increased tax burden on profits made from property sales.

The Capital Gains Tax charge for higher-rate taxpayers on UK property is marginally higher at 28% of profits, whereas other assets are taxed at 20%. The rumour of a potential doubling of CGT rates ahead of the 2022 Autumn statement caused alarm among property investors, but the proposed change did not happen.

Taxation rates

The Autumn Statement by Chancellor Jeremy Hunt left many landlords and property investors wondering about the future tax rates for the following fiscal year. The Chancellor indicated his desire that "those with more should contribute more" while avoiding any measures that could negatively impact economic growth.

The government reduced the higher tax rate threshold to £125,000 from £150,000 to generate additional tax revenues of around £1.3 billion.

This change will cause over 600,000 people who earn over £125,000 to increase their tax bills by at least £1,200, including landlords who own several properties or have large property portfolios. A table that outlines the 2023/24 rental income tax thresholds is available. Still, it is essential to note that other sources of income, such as wages, pensions, and profits from self-employed work, can also be considered taxable income.

Landlords can also choose to invest in property through partnerships, limited liability companies and other forms of corporate structure. In this case, the profit will be subject to corporation tax, currently at 19%.

Mortgage interest tax relief

Tax laws for landlords underwent a significant change in April 2020. Before this, UK landlords could deduct their mortgage costs from any rental income, allowing them to achieve a lower tax bill by a substantial margin. However, with the advent of the pandemic, the system transformed, and landlords are now only eligible for tax credits equivalent to one-fifth of their mortgage interest.

As a result, landlords who fall under the higher tax bracket can no longer claim the full extent of the tax relief. This is because the credit refunds taxes at an introductory rate of 20%. This change may force tax authorities to place many UK landlords in higher tax brackets as they must declare any income used to pay off a mortgage as taxable income.

However, it's worth noting that these restrictions on mortgage payments only apply to individuals and not landlords who invest in UK buy-to-let property through limited companies.

Dividend allowances

The government will reduce the dividend allowance from the onset of the new fiscal year, causing it to decrease to £1,000 annually. This decrease will continue further in the following tax year, shrinking the allowance to just £500 annually. UK property investors who receive company dividends are likely to feel the impact of these changes.

Stamp Duty Land Tax

The government has changed the Stamp Duty policy as the new tax year approaches. The government has reduced the tax paid during a property purchase as per the mini-budget of 2022. The requirement to declare any income used to pay off a mortgage as taxable income could place many UK landlords into higher tax brackets.

For example, the recent modifications of SDLT allow landlords who acquire a residence valued at £450,000 to avoid paying tax on the initial £250,000. However, for the subsequent £200,000, a tax rate of 5% will be levied, resulting in a stamp duty payment of £10,000.

The future for buy-to-let landlords in the UK

Whether UK buy-to-let investment is worthwhile depends on the investments you're considering and the goal of why you want to invest. Despite the new tax laws expected to cause issues for some UK landlords, many positive reasons exist to consider investing in UK properties in 2023. These include the following:

You'll earn a healthy rental income - in some areas of the UK, rental yields are as high as 11%, with the average rental yield between 3% and 5%.

You could enjoy capital growth when the value of your property increases. While some analysts are predicting a slight fall in house prices in the coming months, it's worth considering that property values have risen by approximately 60% since the beginning of the century.

Demand for rental properties is at an all-time high. Many people can’t be able to purchase a property outright, and the need for UK properties means that the rental market is currently robust.

While UK buy-to-let landlords are subject to increasing legislation levels, property remains one of the safest and most resilient investment forms.

Suppose you want to know more about property investment or are an existing buy-to-let landlord who could benefit from the tools and datasets available via PropertyData. Why not sign up today with a two-week free trial?