Now that the dust has settled it’s time to re-asses the Summer Budget – and its effects on buy to let landlords.
Many thousands of buy-to-let landlords will take a hit in their earnings after George Osborne cracked down on mortgage interest tax relief in his Summer Budget last week.
Mortgage interest relief was withdrawn from homeowners some 15 years ago, but landlords still receive the relief, to the consternation of many, particularly the high profile renter’s campaigning groups.
The ability to deduct these costs, according to some, puts investors in rental property at an advantage. Certainly, tax relief for finance costs is particularly beneficial for wealthier landlords with larger incomes, as every £1 of finance cost they incur allows them to pay 40p or 45p less tax.
In a policy change in which he wants to “level the playing field for homebuyers and investors”, in Mr Osborne’s own words, he will limit the amount landlords can claim, as mortgage interest relief is to be set at the basic rate of tax – currently 20 per cent.
The change is to be phased in over a four-year period from April 2017 and will save the Treasury around £6.3billion a year when high and higher rate tax payers on the 45% and 50% are excluded from the benefit.
A further blow to landlords is the tightening of the “wear and tear” allowance which currently allows landlords to deduct 10% of the rent from their profits to account for wear and tear, regardless of whether they have improved the property or not. Landlords in future will have to prove they have improved or maintained their rental property before they can deduct the costs from their taxed profits.
Experts are warning that there could be two effects from these changes:
- Landlords may try to hike rents for tenants to compensate for this loss of income, and
- Landlords may choose to own their properties through a limited company rather than personally.
Both of these compensating measures will have their difficulties. In many locations rents are high enough already due to the limited supply of housing in general and rental property in particular. Rent rises will only continue to exacerbate the bad feeling that already exists towards buy to let landlords by the general public, and in many cases rents are such a high proportion of renters incomes, the tenants will struggle to pay it.
In the case of corporate structures, although they continue to benefit from relief on mortgage interest payments, there are several other fairly complicated tax implications, which mean not everyone will benefit.
Nevertheless, Steve Olejnik, sales director at buy-to-let broker Mortgages for Business, told the Financial Times:
“One thing I am certain of, is that more landlords will now look to set up limited companies through which to purchase buy to let property.”
The ever lowering of corporation tax is an added attraction as Mr Olejnik says:
“In addition to avoiding the reductions in personal benefits, Mr Osborne’s announcement that corporation tax will be cut to 18 per cent by 2020 will inevitably increase the popularity of limited company buy-to-let mortgages.”
But corporate ownership of buy to let property is only likely to benefit those who take a long term view with their investments, as Simon Checkley, managing director of mortgage broker Private Finance, told the FT:
“On the face of it, it looks attractive, especially since individuals looking at this sort of investment are normally able to time the disposal of an asset to suit the tax rates that apply to them at the time. The caveat is that they will need to seek advice from a tax adviser.”
One major obstacle to going corporate is capital gains tax. Investors could effectively end up being taxed twice: once with the corporation tax levied on gains within the company, and again when they draw money out.
Another important consideration is the increase in company dividend taxation, which the Chancellor introduces with this budget. It will push up the tax bills of top-rate taxpayers, those receiving more than £25,250 in dividends a year.
Some 45 per cent taxpayers could see their tax rate on dividends increase by nearly 20 per cent to 38.1 per cent, which is on top of the 20 per cent of corporate tax already paid by the company, meaning there could be some big losers as a result of this change.
For those with a long time horizon, intending to build a fairly large portfolio, reinvesting over a long period, corporate ownership could still make sense. But for most small-scale buy-to-let investors it’s a non-starter, especially when you add in the company set-up costs, stamp duty, accountancy and company administration costs which go with limited company ownership.
A further consideration is the difficulty of getting loans for a corporate entity when most buy to let lenders will lend only to individuals. Those that might lend to corporates, and there is a limited choice, will charge higher interest rates, typically by half a percentage point.
The mortgage availability situation could change in future if there is more demand for this type of corporate loan, but it has to be said that the tax implications of incorporation for property investing is complex and requires specialist tax advice before you even consider it.
How can Landlords Combat the Tax shock of the Budget? – http://t.co/Hilqgs0VL0
— LandlordZONE® (@LandlordZONE) July 17, 2015