SAIF Golden Charter

Who would want to be a landlord?

Although we constantly hear Government telling us about a housing crisis and there being a shortage of affordable housing we also have, it would appear, a change in taxation to discourage private landlords.

Many people have in recent years looked at being landlords, often using buy-to-let mortgages, as a way of providing a second income and often as a provision for income in retirement. The expansion in this area has been in part the result of a disillusionment in pension provisions provided by the Financial Services industry and in part following the fall in interest rates.

So what are the main tax changes that are hitting residential landlords? First is the restriction, starting this year, of tax relief given on mortgage interest – not a problem if you have no borrowings but in some instances this can be a major cost.

Secondly there is the targeting of second residential property acquisitions with the increased stamp duty land tax, and finally there is the retention of the higher rate of capital gains tax for residential property. The first and third issues are restricted to those operating as individuals or through partnerships.

Interest restriction

Starting this tax year, interest relief is being restricted to basic rate tax, which could mean an increase in tax for those in higher rate bands or might mean pushing people into higher rate bands.

Under the new system you first must calculate the net rental income before any interest allowance which will establish the tax rate band the rental income falls in. The amount of interest allowed is the smaller of the net rental income or the interest paid – in other words interest can no longer create a loss. The tax relief on that figure is then ultimately restricted to relief at basic rate tax only but phased in over four years (2017/18 25% restricted, 2018/19 50% restricted, 2019/20 75% restricted, 2020/21 onwards all restricted).

For many this may not be too big a cost as interest rates are currently low, but for some this may move a property portfolio from being cash positive to cash negative and prompt other action.

Stamp Duty Land Tax

Not restricted just to buy to let property – any second residential property will carry an extra 3% SDLT charge on acquisition.

Capital Gains Tax

Only relevant if you are going to sell, but may be an issue with those looking to reduce a portfolio because of the interest issue, but gains on residential property not subject to the principal private residence (PPR) exemption are taxed at 18% and 28% depending on if you are a higher rate tax payer or not and remembering the gain could make you a higher rate tax payer.

In addition, the tax should now be reported and paid within 30 days of the completion of the sale if the landlord is non-resident. This can be a complex calculation, especially if you have a property which has a partial claim to PPR.

Considerations

Many are looking at incorporation to reduce some of this tax burden but it needs to be done carefully, as if not done correctly transfers can trigger larger SDLT and CGT liabilities.

Certainly, those looking at starting out as property owners need to very carefully consider their aims and the business structure best suited. When buying, many are reducing SDLT by buying properties in need of substantial refurbishment and even self-build, but trading needs to be carefully considered.

This is not the end for the buy-to-let landlord, but the level of borrowings and structure of the enterprise need to be subject to greater scrutiny.

Jonathan Russell is a chartered accountant and partner at ReesRussell in Witney, Oxfordshire, and Russell Phillips in Gerrards Cross, Buckinghamshire. His firms are members of the UK200 Group of independent accountants and lawyers.