First published June 2019. Edited for our website by Ben Rose – Click here to download the original articles in PDF format and subscribe to updates
On August 20th, 1940 Winston Churchill delivered ‘The Few’, being one of the most recognisable speeches ever given in the English language.
Wind the clock forward to 2019 and he might have been saying;
‘Never in the field of British politics has so much been taken away from so many by so few’.
I am of course talking about George Osborn’s now infamous S24 Tenant Tax and his successors ‘reforms’ to S21 Notices and the like.
Add to that the entire Brexit debacle, a Tory party in complete disarray, and a political throw-back in the form of Comrade Corbyn who despite all the evidence to the contrary believes that Marxism actually works; it’s no wonder that the entire Private Rental Sector (PRS) feels as besieged as our forebears did in those dark days when we stood alone against tyranny.
Some of you may say that I’m taking my analogies too far, but when you take into account that the PRS is the only sector to be taxed on turnover and not profit, then perhaps I’m not going far enough.
Tax Contributions from the Private Rented Sector
According to analysis by The National Landlords Association, the PRS contributes at least £3.84bn a year in taxes, which is more than the £2.9bn that the entire UK gaming and betting industry was forecast to pay in 2016-17, and greater than the banking levy of £2.6bn.
That’s not counting the hundreds of millions of pounds raised through Stamp Duty, Capital Gains Tax, Council Tax, and Licensing fees, and that these numbers quoted are pre-S24.
The Government is being short-sighted
So let’s now take a look at how government policy is distorting the rental property market.
In the excellent report by the Institute of Economic Affairs (IEA), Taxation Without Justification, the authors write that the PRS plays a critical role in increasing and improving housing provision in the UK.
Around 80% of private sector tenants are satisfied with their homes, which compares favourably with that in the social rented sector.
This contribution by the PRS has gone unrecognised: instead, landlords have been made convenient scapegoats for a housing crisis primarily caused by land-use planning restrictions.
The government has recently passed tax measures that discriminate against private rented housing, both as an asset class and as a form of housing tenancy. The most damaging of these measures is ‘Section 24’ which prevents landlords entirely offsetting mortgage interest costs against rents before taxable profits are calculated.
As a result of that change alone, many landlords will pay huge amounts of tax as a proportion of profits, meaning that in some cases the tax rate will exceed 100% of their underlying profit leaving landlords making losses where before they were making profits.
The government has also increased Stamp Duty (SDLT) on buy-to-let properties. SDLT, in general, is widely regarded as one of the worst taxes from an economic efficiency point of view.
The late James Mirrlees, Nobel Prize winner in economics wrote:
‘There is no sound case for maintaining stamp duty and we believe that it should be abolished’
‘stamp duty and business rates defy the most basic of economic principles by taxing transactions and produced inputs respectively’.
Looking at Stamp Duty in particular, a House of Lords committee has called for the government to reform stamp duty because it has “seriously distorted the housing market” .
The House of Lords economic affairs committee chair Lord Forsyth added that stamp duty in the capital has “brought some sections of the housing market to a complete dead stop”.
Increases in landlord taxes are likely to reduce the supply of rental housing, increase rents, reduce quality, and reduce the size of the ‘professional’ landlord sector, being the exact opposite of George Osborne’s stated objectives to professionalise the sector.
Overall there is a huge misunderstanding at Westminster that the Private Rental Sector is doing nothing more than holding passive investments designed solely to exploit those who cannot afford to buy their homes.
Whilst that view is something that we’ve come to expect from the Left, it now seems to apply to the political class as a whole.
A psychological shift in the landlord sector?
On the other hand, if it wasn’t for S24 very many BTL landlords would still be struggling and doing nothing to build, run, and grow professional businesses.
So perhaps, rather than being vilified as one of the four horsemen of the apocalypse, George Osborne should be seen as the landlord’s knight in shining armour by single-handedly ‘concentrating’ the sector’s collective psyche on running a business as opposed to having had an ‘accident’!
Most of us are perfectly happy to gripe about the amount of tax we have to pay the State protection racket, and rightly so; but rather than continuing to let the tax tail wag the planning dog, perhaps now is the time to turn the telescope around and start looking at the future rather than the past.
Tax Structures for Businesses – an unfair playing field?
There are a range of structures available when setting up a business, each with differing tax and commercial consequences.
According to the Chartered Institute of Tax Accountants (CIOT), the potential tax advantages of using one structure over another, or a combination of structures, are merely one of the commercial issues to be considered when setting up any business, and derive from the inherent differences in tax rates on corporate and non-corporate structures.
The CIOT go on to say that if the government is intent on leveling the playing field and making tax fairer, a better option would be to address these underlying differences. Otherwise, it should accept that businesses will utilise a range of structures to try to prevent their competitors from gaining a commercial advantage over them.
Meanwhile, as Lord Justice Tomlin said in his 1936 landmark ruling when the then Duke of Westminster was challenged by the HMRC of its day;
“Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.”
With that spirit in mind, the chart below illustrates three of the most discussed options for portfolio landlords (with existing buy-to-let rental property portfolios) considering structural changes to how their portfolio or property business is run.
*Loss of personal allowance between £100,000-£125,000 **Corporation tax at 19% followed by dividend tax at 38.1%
If S24 didn’t exist would you still incorporate?
As Samuel Johnson so aptly said, “Depend upon it, sir, when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully.”
Pretty much the entire PRS thought that S24 was said hangman, and there’s been a headlong rush to take the panacea of incorporation as their last-minute reprieve, even though the ‘drop’ might very well be even sharper when that particular bear trap is finally sprung. Read more on the potential pitfalls of incorporating your property portfolio.
If you’d like to find out how you can maximise the commercial benefits of building, running, and growing a professional property business insofar as the law allows, then start by taking our free initial assessment.
Before making any decisions we recommend you take joined up professional advice to ensure you are best positioned to obtain your goals, be that to maximise the value of your business both today and during your lifetime, and/or ensuring that you can pass on your hard-earned wealth to those you care about most.
Less Tax 4 Landlords is a specialist multi-disciplinary consultancy service that helps portfolio landlords maximise the commercial benefits of building, running, and growing a recognised professional property business. This is achieved by housing the following services under one roof: Business Planning, Tax Consultancy, Legal Work, Accountancy, Business Succession Planning, Personal Estate Succession Planning and at arm’s length, Financial Advice. By bringing together a wide range of services and expertise, we help you to maximise the value of your business both today and during your lifetime, and to create true inter-generational wealth.
Typically, Less Tax 4 Landlords can help you if you:
- Own rental property in personal names
- Are (or would otherwise be) a higher or advanced rate taxpayer
- Are a portfolio landlord with 4 or more properties and in excess of £50,000 Gross Rental Income, or you have the means, motivation and opportunity to get there and beyond with a protective structure in place
- Are looking to build, run, and grow a professional property business which is capable of being passed on intact to future generations
If you would like to find out if we can help you benefit financially from running a professional property business, take our free initial assessment here.