How will the spring budget affect landlords and investors? Belvoir CEO Dorian Gonsalves advises…

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Capital Gains Tax

Prior to the recent budget there was a great deal of speculation about whether Capital Gains Tax (CGT) would be increased to the same level as income tax. As we now know, CGT was not increased on budget day, BUT before landlords and investors breathe a sigh of relief, it is worth noting that on 23rd March the Government intends to publish a range of tax consultations, which may well include changes to CGT.

I believe it is likely that CGT will be increased, but I also think that any increase is likely to be phased in over a period of time, in much the same way that higher rate tax relief on mortgage and finance interest for higher rate taxpayers was reduced over a four-year period. This will give people the chance to plan their tax affairs. As CGT is a tax on profit resulting from the sale of an asset there will be many people, landlords included, who may be at the end of their investment cycle and will be particularly concerned if CGT is increased. Some sort of phased approach is certainly the lesser of two evils when compared to an immediate increase.

Corporation Tax

I think all of us of are expecting to pay more tax in the years to come, but it will be interesting to see whether Rishi Sunak uses ‘tax day’ on 23rd March to completely overhaul some elements of our tax system. This is definitely a day to look out for if you are a landlord or an investor!

In the budget Rishi Sunak said he was keen to protect small businesses with profits of £50,000 or less. To do this he has created a Small Profit Rate (SPR) of Corporation Tax, which will allow them to remain at the current rate of 19%. He claims that around 70% of all companies (1.4 million businesses) will be completely unaffected by a change in Corporation Tax. As most landlords in the UK own less than two properties (on average 1.8 properties) they are unlikely to be affected.

Although companies with profits of less than £50,000 are protected from a further increase, businesses with profits of more than £250,000 will be taxed at 25%, with a taper in between these two levels of profits. This may impact some landlords who became incorporated to take advantage of the tax benefits of a limited company. It seems clear to me that it is the Government’s intention that companies will be asked to pay the greater share of the Covid expenditure. Indeed, it may ultimately be Sunak’s intention to increase corporation tax across all companies regardless of level of profit – but this is yet to be seen.

Property prices

It is clear that property price and rents are going to increase over the next 12 months and beyond. As far as house prices are concerned, property website Rightmove reported that on the day of the budget there was an immediate spike in activity, with the number of visitors surpassing 9 million for the first time. The previous record was 8.5 million. There were two reasons for the record numbers of viewings – firstly Sunak announced that the stamp duty holiday would be extended for a further three months and would then only be applied to properties over £250,000 for another three months. In addition, first time buyers buying a property under £500,000 will be exempt from paying stamp duty.

These changes to the stamp duty holiday will help any deal that may have otherwise fallen through, or that may be in the pipeline, as buyers now have a further three to six months to complete on the deal. It may also benefit a small number of new deals on properties that are worth less than £250,000 as long as they get the deal through by the final date of 30th September 2021. The average time it takes from a property first appearing on a property portal to eventually completing is currently six months. It is therefore unlikely that a new swathe of buyers will suddenly benefit from this tapering tax in stamp duty, although some of them certainly will.

The second reason for a spike in activity is the first-time buyer incentive of the return of the 95% mortgage. This, combined with the stamp duty extension, means there will be a cohort of new buyers over the new 12 months, and it is highly likely this will lead to increased prices in most areas of the UK outside of London.

Rents

I am a landlord myself, and my ears pricked up during the budget when Sunak and Johnson made it clear that they wanted to see generation rent become generation buy. This is an admirable goal for the many renters would like to become homeowners, however property stock is limited and there are around 13 million people renting in the UK, with many of them entirely happy to stay in the PRS for life.

Due to the constant shortage of properties being built and the Government’s assault on landlords over the last five years, I think it is likely that rents outside of London will increase by between 3-5% each year for the next two to three years.

In summary, if you are a landlord and you are in this for the long-term, not only will you see your assets increase in value, but you are also likely to receive healthier returns in the short to medium term.

To find your nearest Belvoir office to receive free advice, visit: www.belvoir.co.uk

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