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Could November’s budget be the final straw for landlords?

  • 4 min read
  • 8 Sep 2020
Could November’s budget be the final straw for landlords?

The coronavirus pandemic has put the UK government under some serious financial pressure.

From the Self-Employment Income Support Scheme (SEISS) to the furlough scheme to Eat Out to Help Out, they’re scouring for cash to supplement the COVID-19 spending. 

And this could come in a variety of different forms:

  • A Wealth Tax introduced
  • Changes to Inheritance Tax
  • Capital Gains Tax to follow the Income Tax model
  • Reduction or scrapping of pension tax relief
  • Changes to Corporation Tax

Let’s talk landlords

In recent years, tax changes have made being a landlord significantly less profitable than it used to be. It’s caused one in ten landlords to consider switching to the popular holiday let model, using platforms like Airbnb to rent out their properties. 

Here are four major changes that have impacted the landlord community:

  1. Reduced tax relief on mortgage interest

From 2017, your ability to deduct mortgage interest payments from your tax bill started to reduce. Now, in 2020, you’re not allowed to deduct them at all. You’re taxed on all of your rental income, not just your profits, and can claim only a 20% tax credit from the total.

  1. The tenant fee ban

From June 2019, landlords and property management companies were no longer allowed to charge their tenants for administration such as:

  • A guarantor form
  • Carrying out credit checks
  • Referencing charges

Instead, they have to pay this from their own pockets.

  1. The abolition of section 21

If this comes into force, landlords will no longer be able to evict trouble tenants at short notice without a good reason. This means that landlords could end up stuck with tenants that damage the property or don’t pay their rent on time etc. for long-term leases. That said, having good insurance could protect you in this circumstance. These changes were discussed by the government in December 2019, but are as yet to be implemented.  

  1. The 3% Stamp Duty surcharge

When you buy a second property, a holiday home or a buy-to-let property, you’re charged 3% more Stamp Duty Land Tax (since 2016) than when you buy your own home. This can amount to thousands of pounds extra due in tax. 

Is being a landlord still lucrative?

The best way to answer this question is with a comparison between your potential profits in 2016 in comparison to what they are today.

On a property that brings in £1000 monthly rent and pays out £300 in mortgage interest:

Annual rental income£12,000£12,000
Annual mortgage interest£3,600£3,600
Claimable mortgage interest£3,600£0 (but instead you get a 20% tax credit worth £720)
Taxable annual income£8,400£12,000
Basic rate tax bill£1,680£1,680
Higher rate tax bill£3,360£4,080

The most impacted by recent tax changes are the higher rate taxpayers and landlords with smaller buy-to-let businesses. In addition to this, those with a single buy-to-let property that they’re using as an instrument for savings or future endeavours have also seen less profit from their rental income as a result of changes to landlord taxation.

Consequently, many landlords have decided to sell up or change their model to see better profits.

What will the Autumn budget bring? 

The biggest proposed change that could impact landlords is a potential change to Capital Gains Tax (CGT).

Capital Gains Tax is a tax on your property profits that exceed £12,300. Currently, the rates stand at 18% (for basic rate taxpayers) and 28% (for higher rate taxpayers). 

But we could see these rates increase to match Income Tax. That would push those who earn less than £50,000 per year to pay 20% in CGT, and those earning more than £50,000 per year to a staggering 40% in CGT on their property profits.

And this will forge an unfortunate catch-22 for many in the buy-to-let property market. Whilst taxation changes render many property businesses unprofitable, simultaneously, if you sell up, you could be hit with a 40% CGT bill. 

“Understandably, the Chancellor is keen to refill the Government’s coffers following the pandemic, but I worry that this latest hit will not only disincentivise new landlords from joining the market but for those forced to sell up. Smaller landlords are already leaving the market due to previous tax changes and are forced to sell their properties. For those that stay put, the extra costs will likely inflate rent for ‘Generational Rent’ tenants further.”

Our CEO Tram for The Daily Mirror.

CGT changes in practice

So, let’s look at how these potential changes could impact you. 

On a property that you sell for £200,000, on which you make £20,000 profit, Capital Gains Tax is calculated based on your overall income. Take a look at the tables below to see the change in CGT tax charges that you could be facing:

Annual salary£26,000£60,000
Tax-free capital gains£12,300£12,300
Capital gains <£50,000 taxed at 18%£7,700£0
Capital gains >£50,000 taxed at 28%£0£7,700
Total CGT on profit £1,386£2,156
With potential changes
Annual salary£26,000£60,000
Tax-free capital gains£12,300£12,300
Capital gains <£50,000 taxed at 20%£7,700£0
Capital gains >£50,000 taxed at 40%£0£7,700
Total CGT on profit £1,540£3,080

For those who earn less than £50,000 salary per year, the potential rise in CGT would only cause a 2% increase on what they pay today. It’s the higher earners – those earning more than £50,000 per year – that will see a much larger impact. The 12% increase could push many buy-to-let landlords into a corner where it’s neither profitable to keep their properties nor profitable enough to sell up.  

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