Are Properties Still a Practical Investment for Buy-to-Let Landlords?

Sunday 19 September 2021

Written by Barry Soraff

Are Properties Still a Practical Investment for Buy-to-Let Landlords?

Are Properties Still A Practical Investment For Buy-to-Let Landlords?

Over the past few years, there have been some massive tax increases as part of a wider strategy designed to take the heat out of the property market. We have had time to assess the impact of those changes, in particular the withdrawal of higher rate tax relief on buy to let mortgage interest that is now fully implemented.  There have also been further tax changes that have heavily impacted the market along with temporary reliefs introduced to help during the Covid pandemic.

With all that in mind, I thought it might be time to provide an update across a range of property tax areas starting with interest relief.

Income tax interest relief restrictions

The 2020/21 tax year that ended on 5 April just past saw the final stage of the implementation of restrictions on income tax relief for buy to let landlords.  So what have been the main impacts of this:

  • A huge increase in tax bills for existing buy to let landlords with mortgaged portfolios that have made no changes particularly those who are in employment;
  • A steady stream of small landlords exiting the property market;
  • A large number of landlords who have transferred their portfolios into limited companies; and
  • A big increase in the number of landlords investing through limited companies.  

Stamp Duty Land Tax (SDLT)

There was a time when SDLT was a bit of an afterthought – an insignificant cost of purchasing a property. Those days are long gone and it has become one of the most complex taxes on the statute book with both increased rates and massive changes in scope.  Among the more recent changes have been:

  • The 3% “second property” surcharge;
  • The 2% surcharge on purchases by non-UK residents; and
  • The (now ended) temporary increase in the nil-rate band from £125,000 to £500,000 to help sustain the market through the Covid pandemic.

Annual Tax on Enveloped Dwellings (ATED)

ATED was introduced within 2013 with the aim of encouraging (mainly foreign) families to ‘de-envelope’ their UK residential properties; that is, to remove their UK properties from companies and to hold them in personal names.

The charge initially affected residential properties owned by non-natural persons (ie companies) and valued in excess of £2 million. However, the Government subsequently extended the scope of the charge and it now affects properties worth in excess of £500,000. 

Although reliefs from the charge are available in certain circumstances – typically where the property is being rented to third parties on an arm’s length basis or where the property is being redeveloped – these must be actively claimed failure to do so within strict time limits resulting in penalties.  As such many buy to let landlords, encouraged by the changes referenced above to purchase their property using companies, have found themselves paying penalties in relation to a tax they aren’t liable to pay and/or paying professional fees to file returns just to claim exemption from it.

Inheritance Tax (IHT)

Since 2017, for the first time, foreign owners of UK property – who for many years had owned their assets in offshore companies to shelter them from UK IHT – suddenly found their assets brought within the IHT net by the introduction of complex rules that effectively “look through” the corporate structure. 

Capital Gains Tax (CGT)

Since 2015, the government has introduced and gradually extended the taxes payable by non-resident landlords disposing of UK based property.  We have also seen the introduction of the regime to tax disposals of interests in so-called “property rich” entities, mainly disposals of shares in property companies that could otherwise escape tax.

Corporation Tax

Since 2019, non-UK companies owning UK property were brought within the realm of UK corporation taxes.   This moved them from the previous non-resident landlord income tax regime significantly changing the tax treatment, tax rates and compliance requirements of non-UK companies operating in the UK property market.  These companies represent a very significant proportion of UK property ownership in particular in London and the South East of England.

These are actually only a small sample of the changes that have been made to property taxation in recent years. More than ever it is important to be well-advised when buying, selling and managing UK sited property and to review your position constantly with your accountant.

If you would like to discuss any aspect of this article or for any other business or accounting advice, click here to get in touch. 

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