How Rachel Reeves' Tax Changes in the Autumn Budget Could Impact Property Investors
Rachel Reeves, the new Labour Chancellor or the Exchequer, has announced that the Autumn Budget will take place on 30th October and, without a doubt, it seems that there will be a degree of clobbering in terms of raising taxes. The government have already started managing our expectations by ‘revealing’ the £20 bn black hole, that they’ve inherited from the previous government, but what does that mean to property investors and what are the opportunities to mitigate any adverse effects? Every cloud has a silver lining, right?
Clearly a change of Government heralds a change of emphasis, no new Government comes into office with the promise “we will carry on with what the last lot did”. While they’ve promised not to change VAT, Corporation Tax, Income Tax and National Insurance, everything else is fair game.
Common consensus is Private Sector landlords will get a worse deal, we just don’t know exactly how it’s going to manifest. The next 12 months will give us more clarity, but as the Government aim to get traction during their term in office, they won’t be hanging about, so some of these changes are likely to take place sooner rather than later.
The direct impact for property owners
Capital Gains Tax (CGT) is low hanging fruit. It’s likely to increase, not by a couple of percent, but could almost double – and it’s rumoured that the increase will be immediate. If you’re selling a property that makes it much more attractive if you can complete the sale before the end of October!
Currently CGT is 18% for Basic Rate tax payer and 28% for Higher Rate tax payer, and there’s a likelihood that it may rise to as much 45%.
Where’s the positive in this higher tax? It’s optional, that’s where. Paying CGT can be deferred at the very least, if not avoided altogether, with some nifty tax planning.
There is an antidote to increased CGT rates – don’t sell anything! However, you’re only kicking the problem down the road. If you hang on to all your rental properties, your family will have to pay the inheritance tax (IHT) on your portfolio when you die. The upside is that there are ways to mitigate that with a good financial advisor, or tax specialist.
More good news here is that there is no immediate rush to get this IHT mitigation strategy sorted If you can defer selling by a decade or two, or even longer, you have time to get your tactics as spot on as they can be.
A good interim belt and braces fallback option, once the new rates of CGT and IHT are known, would be to assess the tax hit your portfolio sell off would take, certainly in IHT terms, and get some life cover in place to cover the expected IHT bill. To be doubly cautious, add some CGT ringfencing in the form of Critical Illness cover if ill heath necessitates soe sort of fire sale of your portfolio.
If you have to sell, there’s less incentive to hold out for a high price. If you knock £10K off the asking price, and the new CGT rate is 45%, you’ll only lose £5.5K as the rest will be claimed by the tax man anyway.
Adding insult to injury
Back in 2016 George Osborne’s budget hammered the property world by removing mortgage interest as a personal expense against tax. The implications of that budget only becoming full apparent to many landlords with the passing of time. This resulted in many property investors resorting to starting a limited company to own their properties as a way to sidestep some of this.
The Conservative government, who you’d think would support small businesses, have done the opposite. Perhaps bashing landlords wins easy votes, ‘greedy landlords’ have become anathema in today’s economy.
You could be forgiven for wondering if George Osborne was in cahoots with the financial sector to benefit them, as pushing very small landlords out the exit door could usher in organisations like L&G, Lloyds etc. who are said to be aiming for portfolios of 10,000 properties.
No other business has legitimate expenses that can’t be claimed, so it’s definitely targeting people who have chosen to go into property investment as a profession.
But having a limited company won’t change the impact of higher CGT. It doesn’t matter how you own a property, you are still required to pay CGT.
Another ‘legacy’ from the last Government is the Renters Reform Bill, which was intended to make it harder to evict tenants. The message was ‘Good landlords have nothing to worry about’. But every landlord worries about a bad tenant.
Labour look like ramping this up another level; only time will tell exactly what they intend to legislate for.
In future landlords’ due diligence will need to be higher to ensure they don’t end up with problem tenants. Perhaps there’s a business opportunity to build a website dedicated to ratings for both landlords and tenants!
It’s a British thing
Over the past half century or so there’s been a fundamental shift in consciousness in the mindset of tenants. More than 50 years ago renting was more normal and generally people took care of their properties. Now more and more people resent having to rent, even though they are not in a position to buy.
In many European countries renting is normal and there isn’t that same perception that renting is in any way inferior to purchasing a property. Being a landlord doesn’t have the same stigma.
In Australia, the private rental sector is celebrated for providing a solution to the housing problem.
Population density is a driver. More people arriving every day – legally or not – they have to live somewhere. The UK is a relatively small island, with a population of just under 70 million. France has a similar population, but is more than twice the size (544,000 sq km: 244,000 sq km approx.), so there’s a limit to where more homes can be built.
Despite that, the new Government has promised 1.5 million more homes will be built.
Reports say that Private Rental Sector has shrunk by some 50% since 2016, when George Osborne did the budget that clobbered landlords. In that same time period rents in many parts of the UK have doubled.
Meanwhile rents have risen dramatically. In one case study a 3-bed terraced house and 2 bed semis in Birmingham reported that the rent has doubled over the last 6 years, rising from £650 to £1300. It’s the old supply and demand curve – fewer properties available to rent in the private sector has forced rents to increase a lot faster than inflation. Nor have wages doubled in that time.
This means that tenants are getting a raw deal. And, of course, the reason that is given is ‘greedy landlords’, which is far from the whole story. Interest rates are higher, but a big factor is the increased costs to landlords from Government as detailed above, so owning and maintaining a property is less profitable than it used to be.
The less direct impact
Another target for the forthcoming Budget is pension allowances. Currently you can put up to £60K a year into your pension fund, tax-free. The rumblings are that this will drop dramatically.
As a property investor, adding to your pension fund is a great and tax efficient way to benefit from your profits, meaning that you will have a comfortable pot to support you in your later years.
You would think allowing, encouraging even, the population to create a future for themselves above the pension poverty line by adequately funding their retirement would be a laudable aim for Government of any political hue. Slashing the amount that can be contributed annually would seem unarguably counterproductive to such an aim.
We await to see if there is any substance to the rumours that the Government are suffering from short-term thinking. If there is a determination to tax people on investing in their pensions, but they want people not to rely on state in old age, there must be something they can rely on. Every private pension is taking the strain off the state – increasing taxation on pensions simply doesn’t make economic sense.
Quick history lesson
More generally, the Law of Diminishing Returns applies to taxation. Net tax receipts run the risk of being lower, the higher the tax burden that is levied on the populace. The heavier the tax burden, the more incentive there is to find workarounds to mitigate the tax they pay. Governments potentially lose with a lower tax take than forecast, individuals lose because they pay at least some degree of higher tax. The sure-fire winners are the tax avoidance specialists being paid to find the workarounds.
Remember tax avoidance is perfectly legitimate way to organise one’s financial affairs, but tax evasion is a criminal offence.
Historically, in many other countries reductions in taxation have actually resulted in higher tax take as people no longer see the need to pay tax specialists to find ways around lower levels of taxation.
In short …
CGT will be tweaked unfavourably for anyone who owns investment property. If you’re already in the process of selling a property – give your solicitor a shake to ensure completion before 30th October.
If you haven’t set the sale in motion, take a long hard look at whether it’s more profitable to sell or hold. Maybe talk to a financial advisor for some guidance on the best route for you to minimise IHT.
Be clear on your rights in relation to tenants and ensure you do serious due diligence when taking on new tenants.
Maybe consider switching from residential to commercial property, either in part or in whole. While CGT will still apply when you sell assets, it sits outside Mr Osborne’s tax grab and also outside of the Renters Reform bill.
Bear in mind that commercial property can also be held as part of a pension. It will need to be a certain SIPP or SSAS, you’ll need to ensure it’s the right vehicle. Take advice on this from a suitably qualified practitioner.
Reasons to be cheerful? Yes, but some flexibility on reactions to changing circumstances is like to be required.
