Share this post

Impact of rising interest rates on landlords and property investors

Hollie Chapman
Content Manager

In our latest blog, we take a look at the effect of rising interest rates on landlords and property investors and what they can do to mitigate the impact.

Historic Bank of England interest rate rises

In early August, the Bank of England raised interest rates from 1.25% to 1.75% - the biggest rise in 27 years. Since then, interest rates have increased further to 2.25% (22nd Sept '22) with the base rate predicted to rise to 6% within the next year.

There are challenging months ahead and many property investors are worried about rising costs and increased taxation hitting profit margins.

Increase in BTL mortgage interest rates

One area that many landlords may see an immediate impact is an increase in mortgage interest rates. Mortgage rates, which have been historically low for buy-to-let mortgages, are now rising sharply - according to ThisisMoney, average BTL mortgage rates have more than doubled since October 2021.

Like homeowners, most buy-to-let investors with mortgages have two or five-year fixed-rate agreements, which means for many the rate increase won't have an immediate impact on their finances.

However, those due to refinance soon are likely to see fewer deals at much higher rates than held previously.

We asked the Provestor team what action landlords and property investors can take to offset rate increases

“It’s a good time to take stock of your entire property portfolio and do some forecasting. Go back to your property strategy. What are your goals? How would they be affected by further rate increases?

“Landlords who’ve been hit recently by Section 24 are at particular risk of falling net profits, and are well advised to take this as an opportunity to revisit how their property portfolios are structured.

“Assess your portfolio for weak links and liabilities. If you have a lower yield property that’s had significant capital growth, it could be a good time to sell while property prices are at their peak.”

“Expect and plan for higher interest rates in the short to medium term. It’s looking inevitable that interest rates will continue to increase in the near term in an attempt to cool inflation. Ultimately this impacts yields on properties and some of the increases will be passed to tenants over the coming months and years.

“Be mindful though - an increasing number of economists are predicting a recession as interest rates hikes hurt businesses and borrowers. If the job market cools rapidly, we could not only see tenants struggling with a combination of higher rents, utility bills and living costs, but the threat of being out of work.

“Consider your tenants and their ability to weather the storm ahead. Be prepared to put in place a plan to recover any missed rent payments. Keep checking in on your tenants and if necessary, work together with them to find a solution that works for you both.

“There is a potential flip side for investors. With the heat in the property market pre and post covid pushing prices up, we may see a prices level or even a correction as people seek quick sales or are unable to continue to save for a deposit. For the investor looking at the long term growth, there could be some buying opportunities ahead.”

Use our interest rate rise calculator to work out how much you need to increase rent by to maintain the same profits after tax.

Stay up-to-date
Spend more time on your properties and less time on tax with our monthly newsletter.

“If increasing your rents could tip you into the next tax band, why not consider using a deed of trust to share your rental income with your spouse. A deed of trust is a legal document which changes the beneficial ownership of a property. Here are 3 ways it can be used:

  • When you declare your rental profits on your tax return, you can use a deed of trust to flex the amount of profits shared between the two partners, whether that's 60/40, 90/10 or even 99/1.

  • Secondly, your capital gains tax journey also follows your deed of trust. This means that when you sell the asset, your capital gains tax is also declared in the same proportion as your deed of trust. This is particularly beneficial as you can then utilise both partners CGT free allowance and substantially reduce the amount of capital gains tax you pay.

  • Finally, from an inheritance tax point of view, you may be able to substantially reduce your estate by changing the beneficial ownership between spouses.”

A deed of trust can be complex, and we recommend discussing your plans with a professional tax advisor before going ahead.

Watch our TikTok video about deed of trust here.

“If you have to increase rents to cope with rising costs and run the risk of tipping over into the higher rate tax band, it may be worthwhile considering incorporating your properties.

“It’s important to remember that transferring personally held properties to a limited company is a sale and purchase transaction. This means Capital Gains Tax would be applicable for the seller, whereas the limited company receiving the property would be subject to Stamp Duty Land Tax as the purchaser.

“However, landlords who share larger portfolios, say with their spouses or a partner, may find that they could benefit from:

  • Incorporation relief, which can defer the Capital Gains Tax liability into the future

  • SDLT could be avoided entirely if certain criteria are met

“Individual landlords with sizable portfolios may still see a benefit in the long term of incorporation as the initial costs could rescue their long term income tax exposure.

“Incorporating personally owned properties into a limited company is a specialist and complex area of property tax. If it’s something you’re considering, we recommend getting specialist advice on your situation.”

Was this helpful?

Hollie Chapman
Content Manager

Recent blog posts

Property tax

Budget 2024: Furnished Holiday Let Tax Changes

In the March 2024 budget, the Chancellor announced the end of the Furnished Holiday Let (FHL) tax regime. This shock announcement has left investors worried about the future. In this blog, our Head of Tax unpacks the impact of the holiday let tax changes and advises how FHL owners can assess the impact on their investment strategies and plan ahead.

By Nadeem Raziq | 11/03/2024
Property tax

Spring Budget 24: Overview for landlords

In the Spring Statement, the Chancellor, Jeremy Hunt, set out his plan to promote growth. In this post, we look at the key tax changes that property investors need to know about.

By Hollie Chapman | 06/03/2024

Best UK rental yield hotspots for 2024

If you're planning to invest in rental properties in 2024, it's important to focus on locations that offer the highest rental yields. In this blog, we will share the top UK rental yield hotspots, along with tips to help you find the best investment opportunities.

By Hollie Chapman | 29/01/2024