Over recent years the Government have implemented a series of targeted tax changes designed to bring buy-to-let landlords “in to line” by effectively increasing their tax burden, with the overarching intention of discouraging multiple home ownership and creating an encouraging environment for first time buyers.
Recent reports show that growth in the rental market has slowed, however, it is difficult to attribute this to the tax changes alone, as property prices remain high, rental stock is low, and mortgage regulations are being tightened, all of which can impact on a person’s decision to rent or buy property.
One of the most talked about and perhaps the most scathing of the changes is the phased reduction of Mortgage Interest Relief (“MIR”). Buy-to-Let investors began to lose the ability to deduct mortgage interest from their property profits when calculating their tax liability from April 2017.
Landlords could previously offset 100% of the mortgage interest, however, the phased restriction saw the deductible amount reduced to 50% for the 2018/2019 tax year, falling to 0% by 2020.
This ultimately means that, where applicable, more and more of a landlord’s income and profits will become taxable.
Where residential property transactions are involved, a higher rate of CGT must also be paid (18/28%) as opposed to the standard rates of 10/20%. From April 2020 landlords will also have a shorter time frame to pay the CGT relating to the sale of property, as they will be required to make a payment on account for the tax within just 30 days of the sale.
Finally, there is the Replacement Relief (introduced in April 2016) which takes the place of the Wear and Tear Allowance. Broadly, Wear and Tear Allowance enabled landlords to make a 10% deduction of net rent from profits to cover wear and tear (whether repairs or replacements were made or not) in furnished properties. The new replacement relief is much more restrictive and only allows landlords to make deductions for the actual costs incurred when replacing furniture and furnishings.
It is clear that these changes have been designed to have a punitive impact on buy-to-let investors, and with changes to lending criteria/rates compounding matters, we are now seeing swathes of landlords and buy-to-let investors seeking professional advice to ensure that their business assets and income are protected as far as possible and that their business remains viable.
The cuts to MIR do not apply to limited companies, and limited companies also enjoy lower rates of taxation, both of which are reasons that we are seeing a marked increase in landlords choosing to operate their property business from a corporate entity.
Business continuity is also a concern to investors who have built up a property portfolio, and as such transferring the property business into a successional trust structure could also benefit landlords, preserving the long-term business for future generations as well as potentially reducing the value of a person’s estate for IHT purposes.