A taxing time for landlords…

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:

The Property Value	SDLT Rates	SDLT Rates on Second Homes or Buy-to-Lets
£0 – £250,000	0%	3%
£250,001 – £925,000	5%	8%
£925,001-£1.5mn	10%	13%
Above £1.5mn	12%	15%

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.

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