Property owners hitting a wall of tax

23 March 2016

Gary Heynes

Landlords and second home owners have had a lot of bad news in recent years, culminating in changes in the Summer Budget 2015 and Budget 2016. 

Given the number of changes over the years, it could be easy to overlook the number and extent of these. The changes, just in the last three years, include:

April 2013: introduction of annual tax on enveloped dwellings (ATED); 
April 2013: introduction of capital gains on non-residents where there is an ATED charge; 
December 2014:  new rates of stamp duty land tax (SDLT) for residential property; 
April 2015:  introduction of capital gains tax on residential property for all non-UK residents;
April 2016: abolition of wear and tear allowance for furnished let property;
April 2016:  exclusion of residential property from the lower rates of capital gains tax;
April 2016: 3 per cent surcharge on second homes and buy-to-let property; and
April 2016: new rates of SDLT for commercial property. 

Although some of the changes will be phased in, the cumulative effect will be dramatic for many buy-to-let landlords and second home owners.

Take a typical buy-to-let landlord: assuming a higher-rate taxpayer purchases a buy-to-let property for £200,000, with a loan of £150,000 at 4 per cent interest, it is furnished and yields around five per cent rental income for five years and is then sold for £260,000 with no annual exemption available. The following table shows that the cumulative taxes over the period will have almost doubled, for what would be considered a relatively typical buy-to let investment:

  Old rules (£)  New rules (£)  Difference (£)
SDLT  1,500 7,500  6,000 
Tax on rental income 6,000  14,000  8,000 
Capital gains tax* 12,000  16,800  4,800 
Total 19,500  38,300  18,800 

*The comparison on this line is between the property being excluded and not being excluded from the lower CGT rate.

This excludes the taxes applying to those who are second home owners who hold their property through companies, who would be subject to ATED charges, or those who are non-UK resident.

While, arguably, the residential property market may have needed cooling, time will tell whether these changes have gone too far. If money is diverted elsewhere in the market, the property tax take might fall despite these increases.

If you would like any more information on this, please contact Gary Heynes or your usual RSM contact.