Since 2012 there has been a steady attack on the buy-to-let tax landscape, ranging from higher stamp duty land tax (SDLT) rates, the restriction of mortgage interest relief and capital gains tax (CGT) main residence relief changes. The Government’s stated intention is to dampen the property investment market and boost personal home ownership for first-time buyers.
Have these tax changes meant the end of the road for buy-to-let landlords or are there actions which can mitigate their tax position? The answer, as with all tax questions, is that it depends on the individual landlord’s circumstances.
The impact on buy-to let landlords
Some of the tax changes, such as the restriction of loan interest relief to the basic rate only from 6 April 2020, can have significant adverse consequences for landlords who are higher rate (40 per cent) and additional tax (45 per cent) tax payers. For example, an additional rate tax payer with rental income of £60,000 and mortgage interest costs of £30,000 will see an increase of almost 50 per cent in their tax bill, when the loan interest restriction to 20 per cent only is fully operational in 2020/21.
Anecdotally, higher SDLT charges (more specifically the 3 per cent additional rate applicable on the acquisition of a second residential property) have been hard hitting for landlords investing in more expensive areas such as London, and has stalled investment.This additional 3 per cent applies even if the first property is located outside of the UK. For example, the SDLT cost of buying a second residential property costing £500,000 is £30,000.
According to Hamptons, since the introduction of the SDLT surcharge landlords have sold 50,000 more homes than they bought. However, the current trend suggests that investment in the private rental sector remains robust. There are many reasons for this, some involve implementing tax efficient strategies.
Some potential actions to improve tax efficiency
So, what can be done? There are a number of options:
- Consider incorporating your existing rental activity as this can help reduce overall tax costs. There is currently no mortgage interest restriction for companies and you can take advantage of the lower rates of corporation tax.
- Transferring one or more properties to a spouse or civil partner who is a basic rate taxpayer.
- Retaining the existing buy-to-let portfolio but purchasing new properties through a company.
- Consideration should also be given to your inheritance tax (IHT) position, as restructuring can reduce your annual tax payments as well as your long term IHT bill.
As always, the appropriate tax efficient option will depend on the individual landlord’s circumstances.
Beware of the potential pitfalls and take proper advice
There are various tax charges (CGT, SDLT) which can be triggered on incorporation, so this option may not be appropriate for all landlords. There are potential reliefs available to defer or mitigate these charges, subject to the relevant conditions applying.
In addition, the annual tax on enveloped dwellings is levied on UK residential properties valued at £500,000 or more and owned by companies. Exemptions need to be formally claimed.
There are administrative, filing (Companies House) and reporting obligations to consider. RSM can support landlords in ensuring that you meet these filing and reporting obligations.
On transferring the property to a spouse, care is needed to ensure this does not lift them into the higher or additional rate tax band or result in the loss of allowances or state benefits.
RSM can help with reviewing your tax position and identify any appropriate reliefs and actions, tailored to your requirements.
It’s not the end of the road
Hampton’s survey did conclude that the demand for private rental properties continues to grow. RSM’s real estate sector recent survey supports this trend. This survey found that whilst investment in London and the South East generally may have cooled, the buy-to-let sector remains buoyant in the North West and the Midlands.
Although selling an existing property portfolio may seem like a solution to avoid punitive, property tax changes, this could have CGT consequences, particularly for landlords who have owned their portfolios for many years. However, doing nothing is not really an option. It is important that all landlords review the effects of the changes and consider what action may be required. In short, you should seek advice at the earliest opportunity.
For more information please get in touch with Eugenia Campbell.