A taxing time for landlords…

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Changes in tax rules for buy-to-let landlords have definitely made the business of letting property more challenging, particularly with those who have taken on big mortgages to buy their rental properties.

The removal of mortgage interest relief (Section 24 of the Finance Act) and the substitution of a 20% tax credit, means that in theory it is possible for your buy to let business to be making a loss but still attract some tax liability. Clearly an undesirable situation in anyone’s book – see below for more detail.

Other tax changes added on make it far less profitable for the individual to rent out property. Most landlords are in the business to give them additional income and capital gains long-term, a vehicle to save for a pensionable income in retirement. But with additional regulation in the offing, on top of an already highly regulated sector, and possible further tax changes, its understandable there’s a lot of concern for landlords.

By international comparisons, the UK has one of the highest taxed regimes

Labour’s plans

Labour’s plans give little by way of comfort or reassurance for the small-scale landlord. Labour’s deputy leader Angela Rayner has suggested recently that if elected the party should raise taxes on savings and investments and has promised to look at raising the tax on the rent received from buy-to-let properties.

In a speech in May, Tulip Siddiq, shadow economic secretary to the Treasury, said the party was committed to “unlocking capital”. “Unearned income [such as rent on buy-to-let property] is taxed at a much lower rate than earned income,” she said. [Labour will ensure] anyone who has worked really hard doesn’t pay too much tax. This requires new thinking in terms of regulation and government tax policy. We want to make sure unearned income is taxed properly and we don’t feel that it is at the moment.”

It has been mooted by Labour that a large increase in capital gains tax is on the cards if Sir Keir Starmer, the Labour leader, wins the next election. This debate among senior Labour figures will likely to cause some alarm among savers ahead of the election and could prompt a rush to sell-off assets, including buy to let properties.

Labour’s stated plans to reimpose the cap on tax-free pensions savings has also resulted in warnings in some quarters where many high earners could be encouraged to take retirement early, before the next election, to try to avoid the reimposition of this levy.

Sir Keir and Yvette Cooper, the shadow home secretary, recently refused to rule out an increase in the levy and comes on top of a Labour raid on the middle-classes, including reversing the abolition of non-dom status and the cancelling of charitable status tax breaks for private schools.

The “think tank” report

Labour’s promises, it would seem, are as nothing to the tax change suggestions, put forward in a recently published report by the Resolution Foundation. In the report the Resolution Foundation argues that the country needs a completely new tax strategy to raise growth and reduce inequality.

The report’s suggestions include a hike capital gains tax (CGT), and to subject pensions to inheritance tax (IHT). These proposals are among other measures suggested by this influential think tank to radically change the tax regime in the UK.

Election promises

Ahead of the upcoming election, says the RF report, “the two biggest parties are taking very different approaches to tax policy: one is proposing large tax rises to fund new spending; while the other is likely to offer large tax cuts funded from higher borrowing.”

But it says, “The tax system should aim to create a level playing field for taxpayers, preventing well-advised rich people using its complexity to reduce their bills.”

This think tank is arguing that capital gains tax should be increased to align with the tax rates on employee earnings, including both income tax and national insurance (NI), so the top rate of CGT under the RF proposals would reach 53 per cent for second homes and 37 per cent for shares.

This would be partially offset, it says, by going back to giving an allowance for inflation. In the case of dividends it says, the basic rate of tax on dividends should be increased fro the present 8.75 per cent to 20 per cent, with the higher and additional rates to be cut by about 2 percentage points.

The RF thinks that inheritance tax should be applied to pensions and that the current residence nil-rate band allowance should be ended. Currently this allowance increases the inheritance tax-free threshold from £325,000 to £500,000 for people leaving their home to their children or grandchildren. But to off-set this it proposes lower rates of IHT of 20 and 30 per cent be introduced to make this tax more progressive.

The pension tax-free lump sum, RF is proposing, currently capped at £268,275, should be capped at £100,000., while at the same time NI would be scrapped on employee pension contributions and added to employer pension contributions instead.

Other RF proposals include:

• Cancel (at least) 1p of the 2p corporation tax cut planned for April 2020.
• Completely replace council tax with a progressive property tax – including a tax free allowance – based on up-to-date values (and allow local authorities to raise additional money to build new homes via a property tax building precept).
• Cut residential stamp duty, except for the purchase of additional properties.
• Support further progress on occupational pension saving among low- and middle earners during a period of rising minimum pension contributions by providing a flat rate of income tax relief; and exempting employee pension contributions from employee National Insurance, funded by capping tax-relieved lump sums drawn at retirement to £40,000.
• Introduce a new ‘NHS levy’. This would include charging employee and self-employed National Insurance contributions on the earnings of workers over the State Pension age. It would also place a charge that mirrors employee National Insurance contributions on private occupational pension income, but initially at half the main rate and with a higher starting threshold.
• Abolish inheritance tax and replace it with a lifetime receipts tax with lower rates and fewer exemptions. This should be levied on recipients, with a tax-free allowance to encourage broadly shared inheritances. The existing system could alternatively be tightened by freezing its thresholds, focusing reliefs, removing the normal gifts exemption, and closing pension inheritance loopholes.
• Scrap forgiveness of Capital Gains Tax upon death, at least for additional residential properties and assets qualifying for Business Property Relief or Agricultural Relief.
• Scrap Entrepreneurs’ Relief, or potentially lower its threshold from £10 million to £1 million.
• More broadly, improve the governance of tax expenditures by treating them more like departmental spending.
• Equalise self-employed and employee NICs by raising Class 4 NICs.41
• Levy employer NICs or an equivalent tax on PAYE-registered companies that use self-employed labour (including owner-managers).
• Abolish the marriage tax allowance.
• Abolish Lifetime and Help to Buy ISAs (though technically these are spending measures).

Labour’s re-think?

The only saving grace in all this: it is purely advisory and Labour has more recently stated that it will follow Tory tax policies should it win the next election. A new labour government would have no extra money for public services it has admitted and it would continue Tory tax policies if it should win the next General Election. Both Keir Starmer and his shadow chancellor Rachel Reeves, have stated that while the current cost of living crisis continues, the Tory tax policies will continue, even for the highest earners.

This promise would exclude the range of levies already announced by Keir Starmer, including adding VAT to private school fees.

The current buy-to-let taxes for landlords

From the last September the Stamp Duty threshold was raised to £250,000, a figure which includes buy-to-lets and second homes, with the current 3 per cent surcharge for these. These levels are currently set to stay until March 2025. Here are the current Stamp Duty rates in England and Northern Ireland:

Domestic items relief

The “Domestic Items Relief” replaces what was a blanket 10 per cent Wear and Tear Allowance that landlords could claim against rental income annually. Under the new scheme landlords can only claim for the actual cost of replacing furnishings supplied, for example: moveable furniture, TVs, carpets, curtains, washing machines, microwaves, fridges and crockery.

Fitted items such as baths & toilets, kitchens, heating systems etc., can be repaired or replaced under allowable expenses, but cannot be claim if they are improvements. The latter would have to be capitalised and added to the value of the building.

Mortgage interest relief

Since April 2020, a 20 per cent tax credit for mortgage interest payments replaces the ability to deduct the full mortgage interest payments as an expense.

Before 2017, when the new regime phase-in started, landlords could deduct mortgage interest payments from their rental income. Now, landlords must add the rental income (less allowable expenses) to their other sources of income, increasing their taxable income amount, before deducting the tax credit, which sometimes pushes them into a higher tax band.

View Full Article: A taxing time for landlords…

Latent Gains Impact On Finance Cost Tax Credits + CGT At Incorporation Of Property Rental Businesses

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Latent Gains occur when the total liabilities of a property rental business exceed the total acquisition costs of the business, also known as ‘Base Costs’ for CGT calculation purposes.

This is why it is so important for Accountants of property rental business owners to maintain an accurate balance sheet in addition to profit and loss accounting and filing tax returns.

View Full Article: Latent Gains Impact On Finance Cost Tax Credits + CGT At Incorporation Of Property Rental Businesses

Beadle slams claim that landlords will ‘game new eviction rules’

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Landlord leader Ben Beadle has given Shelter a run for its money during a parliamentary committee evidence session on the Renters (Reform) Bill.

Beadle, who is chief executive of the National Residential Landlords Association, wondered out loud during the meeting whether campaigning groups like Shelter would only be happy once private landlords were ‘publicly flogged’ or ‘waterboarded’ if caught flouting the new proposed eviction legislation within the bill.

He was referring to earlier evidence by Shelter’s representative at the hearing, Tarun Bhakta, during which he repeated the organisation’s recent claims that the bill contains loopholes that will enable landlords to circumvent its tighter Section 8 notice eviction rules, and called for tough sanctions if landlords are caught doing it.

Intention

These will require landlords seeking possession of a property to move back in or sell it to prove their intention in front of a judge.

“The landlords will have to be satisfied that the landlord is telling the truth about selling a property – for example – and last time I checked, if you lie in court that’s perjury, which I think is a pretty strong disincentive,” said Beadle.

He went on to criticise Shelter’s suggestion that landlords should be fined severely if they relet a property following an eviction based on the assertion that they want to sell up or move back.

Housing minister Rachel Maclean (pictured), who gave evidence after Beadle, was asked what her Government will do to stop landlords gaming the system in this way.

Read more about the Renters (Reform) Bill.

She replied that tenants would be given access to the courts if the eviction was found to be illegal; that the new PRS ombudsman to be created for tenant/landlord disputes would also handle such complaints; and that the Government and local authorities would ensure private tenants understood their new rights.

Watch the hearing in full.

View Full Article: Beadle slams claim that landlords will ‘game new eviction rules’

Corporate student rooms giant to ‘clean up’ as private landlords quit market

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The supply of purpose-built student accommodation can’t keep pace with growing student demand as HMO landlords continue to leave the sector, according to the UK’s largest PBSA provider.

Unite Students reports that reservations for the 2023/24 academic year are at record levels, with 98% of rooms now sold, which CEO Richard Smith says reflects strong demand from both students and universities and the attractiveness of its fixed-priced all-inclusive offer.

“This supports an improvement in our rental growth guidance to around 7% for the 2023/24 academic year,” he adds. “Our strong leasing performance will continue to support our property valuations as the market adjusts to an environment of higher interest rates.”

Housing need

As traditdional HMO landlords leave the sector prompted by additional regulation and a looming overhaul of rental contract law, Unite is ‘uniquely positioned’ to address the housing need, says Smith, through its best-in-class operating platform, university relationships development and asset management capabilities.

Demand remains strong from both university partners and students booking accommodation on a direct-let basis, reports the firm, as universities increasingly rely on partners to meet their accommodation needs. It is committed to delivering four new schemes with a total development cost of £339 million.

Unite’s UK Student Accommodation Fund property portfolio – comprising 27,924 beds in 71 properties – has been valued at £2.9 billion, a 1.2% increase on a like-for-like basis during the last quarter.

Its London Student Accommodation Joint Venture investment portfolio – comprising 9,716 beds across 14 properties – is worth £1.9 billion, a 1.1% increase.

Pic credit: Unite Students.

View Full Article: Corporate student rooms giant to ‘clean up’ as private landlords quit market

Kerching! Five tenants pocket £29,000 after landlord fails to licence HMO

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Five tenants have shared a whopping £29,000 Rent Repayment Order after their landlord failed to licence its HMO.

East London-based We Let Rooms Ltd did not defend itself at a First Tier Property Tribunal or come up with a reasonable excuse for the offence relating to the property in Orme Road, Kingston Upon Thames (pictured).

The tenants claimed the firm was slow to respond to issues and would only deal with them superficially, including a leaky roof, leak in the bathroom and ageing cooker.

They were also told by the local housing authority that some of the doors did not meet fire safety standards, and there was no fire separation between the bedrooms and the kitchen.

Patchy

Although the tribunal found that there was some “patchy evidence” of issues relating to fire doors, it said We Let Rooms managed and let out several properties professionally and should be held to a higher standard than someone who simply let out a single property but was otherwise not involved in the property world.

It ruled: “Even if it could be argued that the applicants did not suffer direct loss through the respondent’s failure to obtain a licence, it is clear that a large part of the purpose of the rent repayment legislation is deterrence.

“The respondent’s conduct has not been good. In our view, this justifies increasing the repayment award from 70% to 80% of the maximum amount payable,” the judge said.

The RRO awards ranged from £4,560 to £7,520, with an order to pay £300 costs.

Read the Tribunal decision in full.

View Full Article: Kerching! Five tenants pocket £29,000 after landlord fails to licence HMO

Shelter demands 12 months of no re-letting in new Bill

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The Levelling Up, Housing and Communities Committee has been told that the Renters (Reform) Bill needs strengthening to prevent landlords from using a loophole to evict tenants for no reason.

The follow-up meeting heard that under the proposals

View Full Article: Shelter demands 12 months of no re-letting in new Bill

Are you a Birmingham Midshires customer?

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We remember the times when Birmingham Midshires allowed us to submit 100+ mortgage applications for one Client, in one week. Those were the days, but even now, with all of the new stress testing calculations, LTV caps, and restrictions on how many properties BM will allow you to have with them

View Full Article: Are you a Birmingham Midshires customer?

‘This is why landlords must approach guaranteed rent schemes with caution’

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An Essex landlord has learned the hard way that unpicking rent-to-rent or ‘guaranteed rent’ agreements can be a lot more difficult than many might believe.

In a case handled by the Resolution Department Lead Suzy Hershman (main picture) and her team at HFIS, a landlord who had signed up to have her detached house provide a guaranteed income through a rent-to-rent contract wanted to end the arrangement after relations with the managing agent soured.

The landlord gave the agency, which had already signed up and moved in tenants to the property, three months’ notice stating she wanted ‘vacant possession’.

But the agent declined her request, and the complaint was brought to the HFIS team for resolution.

Vulnerable

During conversations with both parties, it was discovered that the tenants living at the house had been placed by the local authority and were ‘vulnerable’ – so evicting them at short notice was neither practical nor fair.

Also, the rent-to-rent contract used here is a ‘mesne’ agreement due to three parties being involved. Mesne means ‘intermediate’ in old French – so you have a tenant, a ‘head tenant’ (or intermediate) and the owner of the property (the landlord).

Common law makes it clear that unless the original agreement between tenant and managing agent is or was unlawful – which was not the case here – then the only way to end the agreement is for the landlord to evict the ‘head tenant’ (i.e. the managing agent) and the sub-tenant (the people living in the property) through the courts.

No beef

The landlord had no beef with the family living in the property, but rather with the managing agent which she says had been maintaining the property poorly.

HFIS found that the agent had not explained to the landlord why it could not ‘hand back’ the property but, on the other hand, the landlord’s desire for vacant possession of the house was ‘unreasonable’ in the circumstances.

The landlord is left with few options now but is taking legal advice separately about how to proceed.

What are the lessons here?

• Vet rent-to-rent agencies very carefully – for example what’s their office like? How do their staff talk to people on the phone? Are they accredited and do they have valid redress membership displayed in their windows or website?

• Landlords should enter into rent-to-rent agreements with great caution and be well informed. For example, be aware that if they want to end this kind of agreement early, they’ll have to do it through the courts, assuming the initial agreement between agent and tenant was lawful and fair.

View Full Article: ‘This is why landlords must approach guaranteed rent schemes with caution’

Buy the freehold or just renew lease?

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Hello, looking for some advice from Property118 readers. I currently have a lease with 65 years left to run. The property is a house and converted into two flats.

My question is would it be a better option to buy the freehold or just renew the lease?

View Full Article: Buy the freehold or just renew lease?