Recent Tax Attacks On Landlords

Sarah Bradford highlights some tax changes which have had an adverse impact on many landlords. 

In recent years, landlords have been on the receiving end of a number of unwelcome tax changes, which have imposed a stamp duty land tax (SDLT) supplement on the purchase of second and subsequent residential properties, reduced the rate of relief for interest payments, and created a two-tier system of capital gains tax (CGT) whereby residential property gains suffer a higher rate of tax. 

Not only will landlords have to pay more tax, they will soon have to make payments to HMRC more quickly when the payment interval for SDLT and capital gains tax is reduced. 

These ‘attacks’ are explored in more detail below.

A SDLT supplement of 3% was introduced from 1 April 2016. The supplement applies to the purchase of most second and subsequent residential homes where the consideration is more than £40,000. It effectively increased the SDLT payable on the purchase of a buy-to-let property by 3% of the purchase price.

The rates of SDLT for residential properties are as follows:

Up to £125,000 0% 3% 3%

£125,001 to £250,000 (next £125,000) 0% 3% 5%

£250,001 to £925,000 (next £625,000) 5% 3% 8%

£925,001 to £1.5 million (next £575,000) 10% 3% 13%

Above £1.5 million (the remaining amount) 12% 3% 15%

The supplement does not apply if the consideration is less than £40,000, and no SDLT is payable on additional properties where the consideration is below £40,000. However, if the consideration is more than £40,000, the supplement applies to the total consideration, not just the portion above £40,000.

The impact of the SDLT supplement is illustrated in the following example.

Ian wishes to purchase a property as an investment in order to supplement his income during retirement. He finds a property that he likes, which he secures for £350,000. As he has his own residential home, the SDLT supplement applies.

The SDLT payable by Ian is as follows:

By contrast, the SDLT payable on a property costing £350,000 where the supplement does not apply is £4,500. Thus, Ian has to pay an additional £10,500 in SDLT (i.e. £350,000 @ 3%).

The following tables highlight the effect of the SDLT supplement for differently priced properties:

£100,000 £ 3,000

£200,000 £ 6,000

£300,000 £ 9,000

£400,000 £12,000

£500,000 £15,000

£600,000 £18,000

£700,000 £21,000

£800,000 £24,000

£900,000 £27,000

£1,000,000 £30,000

The SDLT supplement only applies to residential properties, so it is not payable if instead the landlord buys and lets out commercial properties. 

The window for paying SDLT is to be reduced from the current 30 days to only 14 days where a transaction takes place on or after 1 March 2019.

A change in the way that tax relief for interest is given to landlords is being phased in over four years – from 2017/18 to 2020/21. Each year, the proportion of interest for which relief is given by deduction decreases and the proportion for which relief is given as a basic rate tax reduction is correspondingly increased. 

This has the effect of moving from a position for 2016/17 and earlier tax years where relief for interest costs was wholly available as a deduction in calculating the profits of the property rental business to one, from 2020/21 onwards, where relief is given in full as a basic rate tax reduction.

The change is phased in such that:

Relief by deduction is simple – the interest and other financing costs are simply deducted as for other expenses when calculating the profits of the property rental business. By contrast, where relief is given as a basic rate tax reduction, instead of deducting the interest when calculating the profit, the interest (or, in the transitional years, the proportion not eligible for relief by deduction) is ignored when working out the tax on the rental profits. The tax bill is than reduced by the basic rate tax reduction, which in most cases is 20% (being the basic rate of tax) of the interest costs. 

So, for example, if a landlord who is a higher rate taxpayer has qualifying interest of £1,000 a year, for 2016/17 interest would be deducted from rental income and computing profits, saving him tax of £400. From 2020/21 onwards, the tax will initially be calculated ignoring the interest, with his tax bill being then reduced by £200 (20% of £1,000). The higher the interest costs, the greater the ‘hit’ on the landlord. The change in the way of giving relief can also have the effect of moving the landlord into the higher rate tax bracket, and potentially triggering the high-income child benefit charge.

To compensate for the rise, the landlord could try and increase the rent charged by a corresponding amount, but that would depend on the market. The landlord could also try to reduce his borrowing if possible or restructure the financing to reduce the amount of interest payable.

Although in some situations, it might be possible to shelter a gain on a let property with a combination of private residence relief and lettings relief (if the property has at some time been the landlord’s only or main residence) and the annual CGT exempt amount where available, it is likely that any gain on the sale of a rental property will trigger a CGT charge. 

Gains on residential property are charged at a higher rate than for non-residential property gains – 28% rather than 20% to the extent that total income and gains exceed the higher rate threshold and 18% rather than 10% where they don’t. The CGT hit can therefore be sizeable.

For example, if a higher rate taxpayer makes a gain of £100,000 on the sale of a let property, he will have to pay £28,000 in tax (assuming the annual CGT exempt amount has been used up elsewhere). This can seriously compromise the ability of a landlord to change his rental property.

Planning ahead is essential. Where possible, consider occupying the property as a main residence for a period to bring the possibility of private residence relief and lettings relief into the equation. Where this is not possible, ensure that available annual CGT exempt amounts (including those of a spouse or civil partner) are used effectively. Some planning ahead is essential – for example, tax can be saved by ensuring two sales do not fall in the same tax year. It is also advisable where possible to sell in a year where any gain is taxed at 18% rather than 28%. Again, consider making use of the ‘no gain no loss’ rule to transfer a property (or a share thereof) to a spouse or civil partner before sale if this would result in a lower rate of tax.

Further changes are on the horizon. From April 2020, a payment on account of the tax arising in respect of the gain on the sale of a residential property will be required within 30 days of completion. This will drastically reduce the payment interval; a tax payment will be required between nine and 21 months earlier than at present, depending when in the tax year the property is sold. This will remove the opportunity to invest the money in the interim. 

These changes make for a harsher climate for landlords, reducing their effective return, unless they are able to pass the effective cost onto renters (which is unlikely to be the government’s goal). Whilst new landlords may be discouraged from entering the market, those with existing properties may simply hang onto them, unable to afford the SDLT hit if they want to change their rental stock, or the CGT if they want to sell up and exit the rental market. 

Consider the options suggested above to mitigate some of the effects of the recent tax attacks on landlords.