UK property rental income rebounds after coronavirus emergency
02 December 2023
The total property income declared by unincorporated landlords in 2021/22 was £48.86bn, compared with £46.37bn in 2020/21, showing a recovery to pre-coronavirus pandemic emergency levels. In fact, reported property income for this group of taxpayers in 2021/22 was almost £1.5bn higher than in 2019/20, before the pandemic hit. Whilst the pandemic hit many industries, it seems on the surface as though the UK property rental market is one that continued to thrive in relative terms. This could of course have been driven by market forces such as reportedly high demand for the rental properties, and gross property income could be set to increase further as more landlords’ fixed mortgage rate deals come to an end and, at least to the extent they are able to, adjust rents accordingly.
Furthermore, average gross property income per landlord in 2021/22 was £17,300. The average earned salary for the same tax year was c.£27,000, just £10,000 more. This correlates with the increased rent that so many families are experiencing.
Of the 2.82 million unincorporated landlords, 89% claimed some form of expenses, such as repairs, or agent fees, against their property income for tax purposes. However, each year fewer residential landlords are claiming finance costs, especially since the restriction on tax relief for finance costs came in in full for the 2020/2021 tax year onwards, meaning that unincorporated landlords can usually only claim a credit of 20% of finance costs against their tax liability on income from property, (the restriction does not apply to commercial properties or residential properties that meet the strict criteria to qualify as furnished holiday lets). In 2017/2018, 54% of unincorporated landlords claimed finance cost deductions, but this dropped to 45% in 2021/2022. As a result of the restriction, financing the acquisition of properties by a mortgage or other borrowing arrangement has been a lot less tax efficient for those paying higher or additional rate tax (or the intermediate, higher or top rate for Scottish taxpayers), and some landlords may have made use of a corporate entity to hold property going forward, which may benefit from a full tax deduction for mortgage interest and a lower rate of tax.
As more landlords look to incorporate their property businesses due to the recent tax changes, there could be a significant increase in property income within corporate structures which is not reflected in the statistics above. Some of these landlords may find their affairs come under more scrutiny from HMRC following the publication of a recent ‘Spotlight’, highlighting a certain type of property business structuring. Furthermore, those landlords who chose to incorporate in 2017/18 to retain tax relief on finance costs may shortly be in receipt of a HMRC ‘one to many’ letter asking them to check that the tax aspects of the incorporation were correctly dealt with at the time, with scope for letters for more recent years to follow.
A rental property can still be an attractive investment for many people in the UK, despite the challenges posed by the coronavirus pandemic, the changes in tax rules as well as obligations imposed on landlords by the Renters (Reform) Bill, which is expected to receive Royal Assent in the spring of 2024. However, with an election in the not-so-distant future, landlords should be braced for further tax changes.
Furthermore, average gross property income per landlord in 2021/22 was £17,300. The average earned salary for the same tax year was c.£27,000, just £10,000 more. This correlates with the increased rent that so many families are experiencing.
Of the 2.82 million unincorporated landlords, 89% claimed some form of expenses, such as repairs, or agent fees, against their property income for tax purposes. However, each year fewer residential landlords are claiming finance costs, especially since the restriction on tax relief for finance costs came in in full for the 2020/2021 tax year onwards, meaning that unincorporated landlords can usually only claim a credit of 20% of finance costs against their tax liability on income from property, (the restriction does not apply to commercial properties or residential properties that meet the strict criteria to qualify as furnished holiday lets). In 2017/2018, 54% of unincorporated landlords claimed finance cost deductions, but this dropped to 45% in 2021/2022. As a result of the restriction, financing the acquisition of properties by a mortgage or other borrowing arrangement has been a lot less tax efficient for those paying higher or additional rate tax (or the intermediate, higher or top rate for Scottish taxpayers), and some landlords may have made use of a corporate entity to hold property going forward, which may benefit from a full tax deduction for mortgage interest and a lower rate of tax.
As more landlords look to incorporate their property businesses due to the recent tax changes, there could be a significant increase in property income within corporate structures which is not reflected in the statistics above. Some of these landlords may find their affairs come under more scrutiny from HMRC following the publication of a recent ‘Spotlight’, highlighting a certain type of property business structuring. Furthermore, those landlords who chose to incorporate in 2017/18 to retain tax relief on finance costs may shortly be in receipt of a HMRC ‘one to many’ letter asking them to check that the tax aspects of the incorporation were correctly dealt with at the time, with scope for letters for more recent years to follow.
A rental property can still be an attractive investment for many people in the UK, despite the challenges posed by the coronavirus pandemic, the changes in tax rules as well as obligations imposed on landlords by the Renters (Reform) Bill, which is expected to receive Royal Assent in the spring of 2024. However, with an election in the not-so-distant future, landlords should be braced for further tax changes.
Michaela Seager
Associate Director
AUTHOR
Michaela Seager
Associate Director
