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Taxed!

In case you hadn’t noticed, there was a Budget recently and some significant changes for landlords.

Let’s go back to the 2016 Budget when George Osbourne stuck landlords with a two-pronged additional tax.

The first prong was an additional 3% in stamp duty surcharge that was imposed on all residential properties that were not main residences.  That was clearly aimed at small landlords as it didn’t apply to commercial properties.

A. Was it to raise extra money?

B. An attempt to get them through the exit door?

The government always needs money, so a) is a sure bet, but what about b)? From where I’m sitting it’s a strategic hidden agenda to pave the way for corporate ownership.  Several thousand landlords are hard to control, corporations are much simpler to manage.

Given that Lloyds Bank, John Lewis and Legal & General have started to build portfolios of residential properties.  We’re not talking a handful of properties, but thousands.

Going back five years to 2011, Multiple Dwellings Relief (MDR) was instituted.  This meant that if you bought multiple properties in a single transaction – same buyer and same seller, The SDLT payable was not on the total cumulative purchase price paid, which would have catapulted SDLT into its higher echelons, but at the value of each property withing the transaction. Rolling forward to that 2016 budget MDR exonerated paying that 3% additional tax.  So if you could find someone selling two or more properties in a single sale and you could finance the deal, you could sidestep that pesky 3% increase in tax.

The second prong removed the ability to claim mortgage interest as a business expense, known as Section 24.  This was part of a process of rejigging what expenditure qualified as business expenses.

In effect that meant that landlords would now be taxed on turnover, not net profit.

The government sneakily used the ‘boil a frog’ methodology, spreading the change over 4 tax years.  Unless landlords were up-to-date, most didn’t notice the change.

It targeted landlords who had built up a portfolio in their personal name.  In essence it could turn a profitable property into a loss-maker.  For instance, a higher rate tax payer with a property whose rental covered the mortgage, plus a £3,000pa surplus, could now have to pay £6,000pa tax charge on entire rental, wiping out the profit and eating into the amount available to cover the mortgage interest.

1. As awareness emerged, landlords resorted to two strategies to get around this.Buy property as a limited company – as limited companies can still claim mortgage interest as an expense. 

As a result, there was an Incredible increase in limited companies – and, correspondingly, a massive increase in mortgages for limited companies.  As a result, mortgage companies developed lot of products created for this market, which completely reshaped the mortgage market. 

But that was future-proofing, not dealing with portfolios that had already been built in the past.  It left landlords with privately owned properties with two options.  They could sell their properties and incur Capital Gains Tax (CGT) – another windfall for the government – or sell them to their newly created limited company – but then they would be liable for both CGT and stamp duty.

The result was an exodus of many thousands of landlords from the market.

2. The second work-around was to stop renting their properties on ASTs and start offering short-term lets, e.g. holiday or serviced accommodation, as these were not subject to the withdrawal of mortgage interest as a business expense, it could continue to be claimed. 

As rental for short-term lets can be up to three times the normal residential rates, a property would only need to be occupied for 10 days a month to generate the same income as it would as a let with an AST.

Thanks to the property education industry thousands of new landlords learned to form limited companies and buy their property that way.  Also discovering the advantages of services accommodation as a money spinner.

The unintended consequences have been a significant reduction of properties ordinary people could live in, particularly in certain parts of the country.  First-time buyers are still excluded because of this new breed of landlord.

So that’s the history … what’s changed?

The March 2024 budget aimed to level playing field, but has it improved the situation?

Not really.  It’s just closed a loophole.

Now, if you own a residential property, it doesn’t matter which method of letting you use, you can’t avoid that inability to claim mortgage interest as a business expense – even for short-term lets.  Although limited companies are still exempt from that restriction. 

2024 saw the scrapping of multiple dwellings relief – or at least it’s been made less of a viable option.  You may still be able to get MDR, but only if you buy 7 or more properties in a single deal.  That’s going to be much harder for small landlords to finance.

There is one little quirk – if you are landlord of holiday let, you can sell it and get a reduction in CGT.  For a higher rate taxpayer, that means a reduction from 28% to 24%.  Clearly the government see that a policy of ‘Bash the Landlords’ is a vote winner.

The law of unintended consequences

There is not enough accommodation for renters.  Housing is a big issue that constantly comes up in discussions with politicians, not least the Mayor of London.  Despite the fact that private sector landlords are logically the salvation to the nation’s housing problems, they are persecuted by the government’s tax regime.  They are presented as the cause of problem, not the solution.

Pragmatically, hundreds of thousands of new people are looking for somewhere to live on a yearly basis, adding to problem.

I’ve been talking to letting agents lately.  One, who rents out normal family homes, reported that the rents have doubled since 2018.  A 3-bed semi in the Midlands that rented out at £650 pm in 2018 is now £1,300.  For sure minimum wage levels have not increase by 100% in that time.

Another agent told me that it was quite common to advertise a property available to rent and get bookings for 30-50 viewings within an hour.  Great for landlords, but not for tenants.

The government’s approach seems to be one that is incredibly short-sighted.  It reminded me of this quotation:

'Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies'.  - Groucho Marx