After a long phasing in process completed in April tough tax changes are challenging landlords.
Despite angry protests the Government were utterly unmoved and now the full impact is upon the sector.
But landlords are adapting.
The changes came into force with the 2020-21 tax year, for which the self-assessment tax return deadline is 31 January 2022.
Perhaps the two biggest blows involved mortgage interest tax relief and capital gains tax (CGT).
Since 2017 a tapering system has meant landlords can now only offset 20 per cent of their mortgage interest payments when once it was the full amount.
Meanwhile, though previously when selling an investment property landlords were able to declare any CGT liabilities in their next annual tax return, potentially giving them well over a year to pay the bill, now they must fork out within 30 days.
And all on top of the introduction of an additional three per cent stamp duty surcharge in April 2016.
Indeed, some landlords have found that the tax they pay on their rental income has risen to in excess of 100 per cent of their overall rental profit. Put bluntly, they are losing money. This is particularly prominent for those with low yielding property.
Accountants and advisers EY noted: “The introduction of the restriction on relief has had a material effect on the cash flow position of buy-to-let rental businesses and has led landlords to reconsider the way they choose to run their rental portfolio.
“Generally, these changes have given rise to higher income tax liabilities for affected landlords. As a result of the reduction of allowable expenditure, taxable rental income has increased, resulting in an increase in their total taxable income. For basic rate taxpayers the increased taxable rental income may have moved them into the higher rates of tax. An increase in taxable income could also affect other allowances and income assessed benefits, such as child benefit. Landlords therefore need to consider the impact of increased tax liabilities on the cash flow and profitability of the rental business.”
It has led to a significant number pulling out completely.
Hamptons International estimates there were 222,570 fewer landlords in the private rental market in 2019 than in 2017. The total now stands at 2.66 million.
However, the average landlord, it states, now owns more properties which suggests the sector is consolidating and becoming more professional.
The changes apply to individual landlords, partnerships and limited liability partnerships, and trustees or beneficiaries of trusts who incur finance costs in respect of UK and overseas residential property. They haven’t affected landlords holding commercial property or properties that qualify as furnished holiday lettings.
Importantly, neither did they extend to residential property owned through a company.
As a result, many bigger landlords have opted for limited company status meaning they pay corporation tax (lower at 19 per cent) rather than income tax on profits. Albeit mortgage options narrow, as fewer providers will lend to a company. And the process of transferring property ownership from yourself to your limited company will count as a sale, which means you may have to pay CGT.
So, before any decisions are made by landlords, consideration needs to be across the board including areas such as corporation tax, stamp duty land tax (SDLT), inheritance tax and the annual tax on enveloped dwellings (ATED), as all of these could affect the tax efficiency of a property business.
Nevertheless, buy-to-let remains a popular investment strategy.
And, looking to the long term, with the population expected to swell to around 74 million in the next 20 years, the potential demand for housing is vast.