The government’s pledge to not raise rates of income tax, VAT and National Insurance contributions during the current parliament (the triple lock) has meant that it has had to look to other ways of increasing the tax take. One particular group who seem to have borne the brunt of the resulting so called stealth taxes, are those individuals owning and renting out residential property.
A long-standing inconsistency
There has always been an inconsistency within the tax system as although for income tax purposes letting of property is treated like a business, for inheritance tax purposes a property business does not qualify for the generous business property relief (BPR). Therefore even some quite large commercially run property portfolios can suffer significantly when the government takes their share on an owner’s death.
However, the last few years have seen a number of other measures introduced which makes owning and renting out residential property less attractive. Firstly, there was the introduction of the 3 per cent stamp duty land tax (SDLT) surcharge on second properties, which not only made the cost of buying them more expensive, but is probably having an effect on capital values. Secondly, although capital gains tax rates have fallen for other assets, the 18 per cent and (more likely) 28 per cent rates have been retained for gains on the disposal of residential properties. Thirdly, we have seen the 10 per cent wear and tear allowance replaced by what many see as a less generous replacement allowance.
The latest strike
But the most controversial measure is the restriction of loan interest relief to the basic rate of income tax only. This measure is probably unique in that tax on the letting of residential properties by individuals is no longer being levied on the commercial return from the business venture, but on something else. In the future this could mean that some taxpayers are making an economic loss, but still find themselves with an annual tax bill. Because relief for interest is to be given by way of a tax reducer rather than as an expense, it can also have an unexpected knock on effect on such things as the personal allowance and child benefit, which can be reduced based on income levels. You can see why this has become a controversial subject.
The interest restriction is being phased in and will only be fully effective from 6 April 2020. However, it is essential that all landlords review how they hold property affected by the changes now and consider what action can or should be taken to mitigate any additional cost. For instance, would the property be better held in a partnership, an LLP or perhaps through a limited company? Each has its own merits, but it is difficult (although not impossible) to easily move from one type of ownership to another.
Do the changes actually make your property business unsustainable, and do you therefore need to take more radical action such as selling part of the portfolio to protect the rest? Lenders will be wise to the changes, particularly on a lending review.
Given the significant and ongoing effect of the changes, it is essential for landlords to take specialist advice before it is too late. We have extensive experience in planning and structuring residential property businesses, so please get in touch to discuss your options.