Key findings from 2016 CML report
In this article, we take you through the key findings from the Council of Mortgage Lenders (CML) June 2016 survey “The profile of UK private landlords” and what this could mean for UK landlords.
The survey was undertaken during a time of political, fiscal and economic uncertainty due to Brexit, and amidst (or even before) a number of legislative changes facing the buy to let market, of which there are varying levels of awareness and understanding amongst landlords. As such we anticipate that the answers given in the survey may well change significantly by the time the next one is conducted.
Andrew Turner, CEO of Commercial Trust, believes that the legislative changes to the buy-to-let market, although not solely designed to encourage a move to a more corporate structure, have been carefully planned:
The current landlord bashing from the Government is part of a three pronged approach; firstly, it gains column inches and press for housing and how the government is seen to be attempting to ease the ‘crisis’. Secondly, it is an easy way to gain instant tax revenue and thirdly, there is little to no downside from doing so. The Government want to entice more corporate investment into the economy and housing is certainly one area they will look to utilise.
Largest UK landlord survey to date
The survey is believed to be the largest to date of UK landlords and comprises answers from 2,517 private rental landlords, of which 861 had buy to let mortgages. The aim was to capture representative responses across all regions of UK and Northern Ireland.
There is currently no way of knowing exactly how many private landlords are in the UK, published figures vary greatly from 1.08 million – 2.49 million depending on source. A 2015 HMRC impact paper suggested a figure of 2.15 million (HMRC 2015). If this figure were correct and still accurately reflected the number of UK landlords, then the results of the report would represent 0.1% of UK landlords.
The survey draws some comparisons with the previous 2004 figures, when the CML last undertook a survey of this type, but those results offer a somewhat biased representation of the market.
In 2004 the 1,340 respondents were chosen due to their current borrowing situation with one of 12 mortgage lenders, whereas the 2016 version in the CL’s own words:
…the current survey…differed substantially from its 2004 predecessor because of the wider remit of the current project, which looked at the entire individual landlord sector, the different market and regulatory conditions, and our assessment of the relative importance of various topics.
Source: CML Landlord Survey 2016
Key findings of the CML Landlord Survey 2016
- Landlords are aging: in 2004 24% of respondents were 55 years or older, in 2016 this rose to 52%.
- Younger property investors should review their debt: younger landlords who own one unit and have more than average debts should be taking a closer look at their financial situation. Many do not expect a cash flow deterioration but are the amongst the most likely to suffer if they experienced one.
- Net yield is overlooked by many: 32% of landlords did not know the net yield of their investments.
- Landlords lack tax awareness: from greatest to least awareness and understanding; 65% stamp duty, 52% mortgage interest tax relief, 41% wear and tear changes, 39% capital gains changes.
- Single rented properties dominate: 62% of landlords own just one rental property.
- Mortgages helped almost half of purchases: one third of landlords currently have at least one buy to let mortgage, but almost half of the properties in the survey were initially bought with one.
- Average rental income £17,300-£20,000/year: £17,300 for mortgage-free landlords, £20,000 for mortgaged landlords; although approximately one third of landlords gave an income of between £5,000-£10,000/year.
- Rental properties are close to home: most landlord’s rental property is close to their own home.
- Flats most popular, HMO’s least popular: 41% of properties owned are flats, 1% are HMO’s (Houses in Multiple Occupation).
- Limited companies are the minority: only 3% of landlords surveyed used a limited company status.
- Buy to let as a pension: one third of landlords view their buy to let investments as a form of pension, one third wanted income and capital growth and 27% said property was a better investment than other opportunities.
- Higher interest payments ok for most: ¾ of buy to let landlords feel they can meet higher payments. Young and single-unit landlords expressed more concern regarding meeting higher payments.
- Landlords with buy to let mortgages better off: with annual incomes more likely to be over £60,000, versus their unencumbered counterparts who were more likely to have annual incomes of less than £45,000.
- Rent constitutes less than 25% household income: for two thirds of landlords.
An aging demographic
The survey showed that the majority of the landlords questioned (over 80%) were aged 45 or more.
Since the 2004 survey, the number of BTL landlords in the upper age 65+ category has risen from 3% to 22% and, the number of respondents aged between 25-34 has dropped from 12% to just 6%.
It is also shown that 1/3 of all landlords surveyed were retired with the greatest concentration of retirees amongst landlords without buy-to-let mortgages. Alongside this is the data showing that over 50% of landlords who bought their first property over 20 years ago are now retired.
The CML surmises that the rate of new investors coming into the market has slowed since 2004, with only 18% of mortgaged BTL landlords having purchased their property in the last 2 years, compared with around 7% in 2016.
We work with lenders who will offer buy to let mortgages to landlords age 18 years or over - in a few instances there is no upper age limit, read more on lender age criteria.
Ownership of BTL
The majority of landlords surveyed do not own their property through a company, 90% were owned either as a couple (45%), individually (42%) or as a group (7%),with only 3% being owned by a limited company.
Since the announcement in the July 2015 Budget of the withdrawal of tax relief on mortgage interest, landlords impacted and aware of this change have been looking for ways to mitigate the additional costs they will incur.
One tactic that has drawn focus in the media is to invest through a limited company. The decision to do so being influenced by a number of factors, including whether the individual is a higher or lower-rate tax payer. Companies pay corporation tax (20% at present, dropping to 18% from 2020) and can fully offset mortgage interest against rental income which private individuals or groups will no longer be able to.
2016 respondents were asked if they had plans to transition to a limited company structure, the answers were split by portfolio size. There was greater interest in doing so amongst landlords with portfolios of 4 or more properties, but largely the answer was ‘no’.
As we get closer to April 2017, and most likely beyond, the interest in this method of investment may well increase, if landlords establish that it is a viable solution for them (the advice of a qualified tax professional is essential).
Read our article on the “Pros and cons of buy to let through a limited company”
Bob Young, CEO of Fleet Mortgages said of the rise in landlords turning to limited company status since the announcement was made:
“Since the changes were announced at the end of 2015 – they’ll be phased in from April this year - we’ve certainly seen an increase in landlords using limited companies, particularly for purchasing, and it is very likely this will continue for the foreseeable future.
Tax advice of course has to be taken but the base point for those purchasing is now to use a limited company – in that sense, it represents a strong business opportunity for both buy-to-let advisers and specialist lenders.
I think we’ll also start to see a growing number of landlords moving properties that they hold individually into corporate vehicles although you have to be very clear about the extra costs that come with this, notably the potential for CGT and stamp duty, which as we know has been increased by 3% for ‘additional properties’.”
Landlord plans to move to a limited company by portfolio size
Yes, I am/ we are
No, I am not/ we aren’t
5 or more
Source: CML Landlord Survey 2016
All landlord plans for their portfolio over 12 months and 5 years
This survey was concluded before the PRA buy-to let-mortgage affordability changes were announced, which may have an impact upon the maximum loan amount available to some landlords.
As a result, the figures surrounding potential portfolio plans for the next 12 months and 5 years may not be a true representation of the current mood.
|Overall portfolio size (units)||Increase rental holdings in next:||Keep the same number in next:|
|1 year||5 years||1 year||5 years|
|5 or more||18%||25%||58%||40%|
|Overall portfolio size (units)||Sell all rental holdings in next:||Decrease holdings but not leave the rental market in next:|
|1 year||5 years||1 year||5 years|
|5 or more||2%||6%||15%||24%|
|Overall portfolio size (units)||Don't know:|
|1 year||5 years|
|5 or more||7%||4%|
Source: CML Landlord Survey 2016
Of all landlords (with and without buy-to-let mortgages) intending to remain in the marketplace, the inclination to decrease number of properties held over the next 1 to 5 years grew with size of portfolio. There was a particularly notable up-tip in these figures for those in the largest portfolio category across a 5-year period.
However, the inclination to increase holdings rather than decrease was stronger across the board (by varying degrees, for each portfolio size category) over both 1 and 5 year periods.
Of all possible actions, the biggest proportion of landlords reported that they intended to retain the same number of properties over a 1-year period, 50% continuing to do so over a 5-year period.
Inevitably there are also some landlords proposing to completely leave the market, the bulk of those were the single-propertied individuals. However, without annual figures over the last few years to compare against, one can’t conclude if the amount of people looking to leave is usual or a reaction to the toughening buy-to-let marketplace.
What motivates mortgaged UK landlords to invest in buy-to-let?
Amongst just landlords with buy-to-let mortgages, the majority were looking to maintain their current property holdings over 5 years. When questioned as to their reasons, those who said they were likely to make transactions most often cited investment motives behind the decision, such as good rental yields or poor performance in other assets.
Landlords who planned to leave the market during either time frame, when asked for their reason, cited their exit from the market as being part of an already agreed strategy.
Reasons landlords plan to reduce their portfolio or leave the market
For those landlords who had answered that they were looking to reduce their portfolio or leave the market within the next 1-5 years (669 out of the total 861) the table below was produced to identify their reasons.
Questions covered both industry-specific and economic factors and given everything that has been changing in both, there is a lot that could potentially be learnt here.
The big questions to ask are to what extent each factor has affected a decision, and whether that decision has changed from a previously held plan – however, we don’t have that here because every factor stipulated could be the main reason, or a small part of the reason for leaving the market given the answers were multiple choice.
Irrespective of the above, those factors voiced most strongly do give us a feel for landlord’s attitudes, and it is no surprise to see the withdrawal of mortgage interest tax relief appearing second biggest reason to reduce portfolios amongst mortgaged landlords.
|Base: All private landlords who plan to reduce portfolio or leave the market in the next 1 or 5 years||All||BTL||Non-BTL|
|As part of exit plan (i.e. to stop being a landlord)||44%||41%||46%|
|Did not intend to be a landlord||23%||15%||28%|
|Approaching retirement age||18%||21%||17%|
|Health / age issues||15%||11%||18%|
|Other tax changes (e.g. SDLT, capital gains tax, wear & tear etc.)||15%||21%||11%|
|Changes to mortgage tax relief||14%||31%||5%|
|Issues managing tenants||13%||13%||13%|
|Stagnating house prices||5%||6%||5%|
|Rental income consistently not paying off mortgages||4%||6%||4%|
|Rising interest rates||3%||5%||2%|
|Worsening personal finance situation||3%||3%||3%|
|Tightening of lending criteria||3%||5%||1%|
|Worsening general economic environment||2%||2%||2%|
|Falling house prices over the last 3 to 6 months||2%||2%||2%|
|Improved performance/returns in stock market or other asset classes||2%||1%||3%|
|Changes in housing benefit||1%||2%||1%|
|Falling tenant demand||1%||2%||1%|
|Proportions citing ANY tax change as reason to sell||21%||36%||13%|
*Question was multiple choice
Source: CML Landlord Survey 2016
The biggest reason cited to reduce portfolio or leave the market was as part of an exit plan, which one could argue could largely be taken as a pre-existing strategy and therefore not influenced by current market factors.
For unencumbered landlords
A significant proportion had not intentionally joined the industry, so this alone is understandably a reason to leave. Other than that, lifestyle issues seem to be the biggest factors (age, nearing retirement, health), but regulatory burden did play a part.
For mortgaged landlords
When you combine the number of mortgaged landlords looking to reduce portfolio size or leave due to any tax reason, 36% (88) wanted to leave during the time frame, showing that many landlords are prepared to adapt to the changing landscape and continue to operate in the buy to let market for the foreseeable future.
Although the Prudential Regulation Authority (PRA) had released a consultation paper in March 2016, the proposed changes to mortgage affordability criteria were not widely publicised until after this survey was released and they were implemented. Had this survey been undertaken later in the year, it is possible this too may have been a contributing factor in these answers.
Similarly, with the first phase of mortgage interest tax relief withdrawal not coming in until April 2017, the associated increase in media hype may have resulted in more landlords citing this as a factor had the survey been undertaken later.
Using a letting agent
33% (284) of BTL landlords let and manage all properties themselves and 36% (309) use letting agents to fully manage all properties. 11% (94) use agents to find tenants for all properties. A smaller percentage (less than 8%) went for a mixture of both.
In the 2016 Autumn Statement, a ban was introduced on letting agent’s charging fees to tenants, which left only landlords to absorb the letting agent costs.
If letting agents do transfer the loss as an increased fee to landlords, this could result in two things. Either 1) landlords will revisit self-managing their portfolios - although the increasingly complex administration of tenancies may make this an unenticing option - which may mean 2) the landlord will continue with the letting agent and pass the extra cost back to the tenant in raised rent.
Source of finance for current portfolio
This was a multiple choice question. 89% (766) of respondents said they had, at some point, used a BTL mortgage. 41% (353) said they had purchased a property from personal savings and 15% (129) said they had either inherited funds/a windfall or remortgaged on a main owner-occupied home.
Are over 55’s becoming ‘Pension Pot’ landlords?
In April 2015, the Government changed the pension rules, allowing anyone over the age of 55 years to access as much of their pension ‘pot’ as they wanted. The first 25% was tax free, but there was the option to withdraw the entire amount subject to taxation, and it raised the question as to whether there would be a rush in ‘pension pot landlords’ looking to invest their newly acquired money in property.
4% (34) of landlords opted to do this, we will have to see over time whether this percentage increases – however, the tax on drawing the funds is likely to have an impact on the popularity of any fund withdrawal, whether to invest in property or anything else.
How many landlords invest with a buy to let mortgage?
The survey asked landlords how many properties were backed by a buy-to-let mortgage.
65% (559) said they had only a single property with a mortgage, 16% (137) had 2 and 9% (77) had 3 mortgaged properties. As the number of properties within the individuals portfolio increased, the percentage of mortgages dropped, with 8, 9 and 10 properties in a portfolio having 0% buy-to-let finance.
Awareness of the recent tax changes
|Base: All private landlords||2,517||861||1,656|
|Aware of it and fully understand the details||30%||34%||27%|
|Aware and have fairly good understanding of the details||31%||31%||31%|
|Aware but do not understand the details||24%||24%||24%|
|Not aware of this at all||15%||11%||18%|
|Deductibility of mortgage interest|
|All||BTL||Of which higher income BTL||Non-BTL|
|Base: All private landlords||503|
|Aware of it and fully understand the details||23%||25%||28%||22%|
|Aware and have fairly good understanding of the details||29%||34%||34%||27%|
|Aware but do not understand the details||24%||27%||24%||22%|
|Not aware of this at all||24%||14%||15%||29%|
|Wear and tear allowance|
|Base: All private landlords|
|Aware of it and fully understand the details||17%||26%||23%|
|Aware and have fairly good understanding of the details||24%||26%||22%|
|Aware but do not understand the details||23%||28%||39%|
|Not aware of this at all||35%||28%||39%|
|Differential taxation of capital gains on residential property|
|Base: All private landlords|
|Aware of it and fully understand the details||16%||16%||16%|
|Aware and have fairly good understanding of the details||23%||24%||22%|
|Aware but do not understand the details||26%||29%||25%|
|Not aware of this at all||35%||31%||37%|
* singles with incomes over £45,000 or couples with incomes over £100,000
Source: CML Landlord Survey 2016
What are the changes to Stamp Duty Land Tax (SDTL)?
Stamp Duty is charged using a tiered structure based on the value of the property. From the 1st April 2016, an extra 3% was added to each tier on purchases of additional residential properties (only properties less than £40,000 are exempt).
Visit our calculator page for more information on the changes, and to calculate stamp duty.
While a combined 65% (560) of the landlords were aware and comprehended the stamp duty changes, the remaining 35% (301) had little to no knowledge or understanding of the change.
When is mortgage interest tax relief being withdrawn?
In the 2015 budget, the then Chancellor George Osborne brought in new legislation to prevent landlords with mortgages from offsetting their mortgage interest costs against their rental profits before calculating tax.
This change is being phased in from April 2017. The level of relief will diminish yearly by 25%, until 2020, when it will be replaced with a basic 20% tax relief.
To calculate the tax on your buy to let income use our calculator.
Just under 60% of landlords said they have a strong awareness and understanding of the incoming changes to tax relief withdrawal, but with 41% (353) not knowing, or being aware but not understanding the changes this represents a worrying proportion of mortgaged landlords who may be vulnerable to the changes.
How has the ‘Wear and Tear’ allowance changed?
Landlords with furnished properties were previously allowed to claim a flat 10% tax relief irrespective of work done. However, after 6th April 2016, landlords were only able to claim tax relief on actual costs incurred .
Read more on the Wear and Tear Allowance changes.
There was approximately a fifty-fifty split in the number of landlords who know about this change, the significance of this comes down to how many landlords utilise this benefit, which is not identified, so we can conclude very little as to the impact it will have.
What is Capital Gains Tax and when do you pay it?
The sale of the following is subject to capital gains tax if you make a profit on it:
- most personal possessions worth £6,000 or more, apart from your car
- property that isn’t your main home
- your main home if you’ve let it out, used it for business or it’s very large
- shares that aren’t in an ISA or PEP
- business assets
As an individual, you are given a ‘capital tax’ allowance to offset against a property sale. In the 2016/2017 tax year, this allowance is £11,100. This is separate from the annual personal income tax allowance.
If the profit on a property sale is more than the £11,100 allowance, you will pay tax. The rate of tax will vary depending on your own circumstances, including if you are a basic or higher rate tax payer and the gains made on the property.
In the 2016 Budget, changes were made to Capital Gains Tax on chargeable assets, wherein the flat 18% (basic-rate tax payers)/28% (higher-rate taxpayers and trustees) rates were reduced to 10%/20%. This did not include residential property, which remained the same.
For the rates pre and post April 2016 read “Capital gains tax – losses and deductions”.
The capital gains changes, which came into effect from April 2016 and before this survey was undertaken, appear to have largely been missed or ignored by the landlords surveyed. 60% (516) of landlords questioned had little to no knowledge of the changes.
This could be because the exemption of residential property from the reduction meant that there was no benefit to buy to let landlords.
Looking at the data presented in the report, Andrew Turner is not convinced that with all the changes and discourse surrounding the buy-to-let market, there will be an exodus of landlords from the sector:
“The fundamental elements in private rental housing are strong. There is an excess of demand over supply, debt is cheap and with plentiful equity in property, tenants will continue to be in a position where they need landlords and the homes they offer.”
The results highlight that of those surveyed, most are individual landlords or couples and view their portfolio’s as a medium to long term investments. With 61% of respondents being 55 or over, and only 6% aged 34 and under, there is a clear divide in the number of younger landlords in the market compared with those of the older generation.
In terms of understanding the legislation changes, the CML highlights that landlords awareness seems to be on a ‘need to know’ basis, however, this can be expected to increase as the changes come into effect. This may lead to landlords, who are not keeping abreast of the legislation, potentially falling foul of the changes.
Andrew Turner goes on to highlight that he does not think that the Chancellor’s Autumn budget was intended to steer personal investment away from housing in the long term:
For me, I think that the Chancellor would prefer us to invest in other areas that are more profitable in the short term, but he does see the pivotal role that investment in housing plays in stabilising the UK economy. A strong housing market has a positive knock-on effect for a multitude of other sectors, who will benefit from the stability and subsequent growth.
Although there has been a 12-year gap between the CML’s surveys and there are some inconsistencies in the data which make it difficult to draw accurate conclusions, this report is a useful indicator on the current state of the buy-to-let market and landlords alike.
It comes at a time when the Government’s policy on the UK housing market is in need additional information to help it shape its decision in the coming months/years in a way that will benefit all.
Source for all tables and survey results from The Council of Mortgage Lenders survey The profile of UK private landlords.
This information should not be interpreted as financial advice. Mortgage and loan rates are subject to change.