OBR warns landlord tax rises will push rents higher from 2027

OBR warns landlord tax rises will push rents higher from 2027

The Office for Budget Responsibility has forecast that the Chancellor’s planned 2% increase in property income tax for landlords, effective April 2027, will reduce landlord returns and likely cause rents to rise over the long term.

The independent OBR published its detailed economic and fiscal outlook alongside the Budget, highlighting the impact of recent and upcoming tax changes on the private rented sector. The report warns that successive tax hikes on landlord income will discourage new investment in rental properties and encourage some landlords to exit the market.

OBR analysis of landlord tax changes and rental market effects

The OBR notes that the Budget includes a 2 percentage point increase in property income tax rates on landlords, building on a similar rise announced in the previous year’s Budget. Both increases take effect from April 2027 and represent a significant reduction in the financial returns available to private landlords.

This cumulative tax burden follows a decade of measures that have steadily reduced profitability in the buy-to-let sector. The OBR cautions that these changes risk two main consequences. First, fewer potential landlords will enter the market, tightening rental supply. Second, existing landlords may pass on increased costs to tenants through higher rents.

The report explains that as some landlords leave the market, those remaining gain greater price-setting power, enabling them to raise rents more freely. This dynamic, combined with reduced supply, is expected to drive a steady increase in rental prices over the long term, partially offsetting the impact of reduced landlord returns.

House prices, mortgage rates and housing supply outlook

Alongside rental market analysis, the OBR forecasts modest house price growth of 2% in 2026 and 2.5% in 2027. This growth is expected to remain below consumer price inflation, driven by higher mortgage rates and stagnant real incomes. The government’s “Your First Home” scheme is projected to slightly increase house prices by stimulating demand among first-time buyers.

Transaction volumes are predicted to reach 1.2 million this year and rise to 1.3 million by 2031, reflecting a return to a medium-term equilibrium where each home is sold roughly once every 24 years. However, these figures are about 4% lower than earlier forecasts due to the dampening effect of higher mortgage interest rates.

The OBR expects average effective mortgage rates to rise from around 4% currently to 5% by 2031, as many borrowers’ fixed-rate deals expire and are replaced by higher-cost loans. Mortgage payments as a share of household disposable income are forecast to peak at 4.25% in 2031, the highest level since 2009 and more than double the 2% share recorded in 2021.

The report also highlights challenges to meeting the government’s housebuilding target of 1.5 million new homes by mid-2029. Regulatory and fiscal changes since 2019, including building safety levies, environmental requirements, and increased corporation tax, have increased development costs and complexity, slowing housing supply growth.

Implications for landlords and the private rented sector

For landlords, the OBR’s analysis confirms that tax rises will materially affect investment returns and market dynamics. The prospect of reduced profitability and increased regulatory costs may deter new landlords from entering the sector, while some existing landlords may choose to sell properties, reducing rental stock.

Landlords should anticipate that these pressures will likely translate into higher rents over time, as supply tightens and remaining landlords gain pricing power. This creates a challenging environment for balancing rental income, tenant affordability, and compliance with evolving regulations.

Letting agents and landlords managing portfolios will need to monitor these developments closely, as the market adjusts to the new tax regime and changing economic conditions. Strategic planning around rent setting, property maintenance, and tenant relations will be essential to sustain viable rental businesses.

What landlords should review now

Landlords should review their portfolios to assess the impact of increased tax liabilities on cash flow and profitability. This includes recalculating expected returns factoring in the 2% tax rise and considering potential rent adjustments in line with market conditions.

It is advisable to check compliance with all current regulations, including safety and licensing requirements, to avoid additional costs or penalties. Keeping detailed records of repairs, inspections, and communications will support compliance and tenant management.

Landlords may also want to explore options for improving operational efficiency, such as using property management tools or engaging professional advice on tax planning and portfolio management. Staying informed about further government policy changes and economic forecasts will help anticipate future risks and opportunities.

Keeping your rental properties compliant amid tax and market changes

TLA membership offers landlords and letting agents access to practical compliance resources and guidance tailored to the evolving rental market. Our new property management and compliance platform, ORBIT, currently in BETA testing, assists with organising property records, managing rental documents, and recording key compliance actions.

ORBIT’s developing features include tools to track repairs, inspections, and communications, helping landlords maintain evidence of compliance and prepare for regulatory changes. Membership also provides updates on tax and legislative developments affecting the private rented sector.

Exploring TLA membership and ORBIT BETA access can support landlords in adapting to the financial and regulatory challenges highlighted by the OBR’s latest analysis. These resources aim to help landlords stay organised and informed as the sector continues to evolve.

Looking ahead, landlords should keep abreast of further Budget announcements and detailed government guidance to ensure their strategies remain aligned with policy changes and market realities.

Sources: Landlord Today