First published August 2018. Edited for our website by Ben Rose – Click here to download the original article in PDF format and subscribe to updates
In August 2017, Simon Lambert wrote in the Mail Online that
“The death of buy-to-let has been greatly exaggerated, however it still remains attractive enough for investors to keep buying, even if the great British property dream is now skewed further towards the wealthy who can buy in cash”.
Only one of his conclusions was right; being that BTL still remains attractive for landlords to keep on buying, but only if they’re prepared to treat it like any other business. The fact that landlords in general are an easy, visible, and politically convenient target to one side, governments of any hue don’t typically bother to regulate (licence) or tax failing industries.
In a similar vein, whatever kind of ‘Brexit’ we get, demand exceeding supply will continue for the foreseeable future (especially when it comes to social housing). Likewise, flexible housing solutions, Generation Rent, Rentvesters, and Donut Economics, all contribute to that opportunity continuing.
Once you strip out the hyperbole (mine included), what has actually happened is that the PRS (Private Rental Sector) now has the opportunity to transform itself from an accidental industry into a professional one, and in the process gain all the advantages that any other business sector would – and that means equal tax treatment.
First things first though – what do the George Osborne tax changes mean in practice?
- 3% Stamp Duty (SDLT) uplift.
This is a transactional tax i.e. it’s just the cost of doing business – in other words, what comes around goes around, but it’s a lot better than its 18th century predecessor, Window Tax.
- Expenses etc. now only allowable in the tax year in which the money was spent regardless of whether that was a loss-making one or not.
Being able to carry losses forward was always an anachronistic contradiction, as it’s more applicable to capital gains rather than income. That said, a business only exists to make a profit, so making a loss, even if it’s just for tax purposes, is counter-intuitive.
- 10% CGT surcharge for investment assets.
That measure alone can often make basic rate taxpayers higher rate ones by the stroke of a pen and can have a huge knock-on effect thanks to S24. CGT really is a voluntary tax; after all, why would you sell an income producing asset simply to spend it all over again unless the expected return on that new investment is more than sufficient to cover the sunk costs and taxes.
- S24 – the amount of mortgage interest higher-rate taxpayers are able to offset.
This measure alone will kill off not just the accidental landlord, but even those who have dedicated their working lives to providing long-term quality housing as if they were a social landlord. We know of landlords who despite housing hundreds of families, employing numerous staff, and paying tax like everybody else, are being forced out of business simply by the tax escalator effect. In other words, as their tax bills rise, the more tax they have to pay in advance, to the point where in 2020/21 the tax due will exceed their profit, and that’s without taking into account their ability to borrow less because of the PRA rules on BTL mortgages.
The graphics below illustrate what S24 alone will do to your tax bill and growth plans. Based on the number shown, the landlord becoming an advanced rate taxpayer will see their tax bill over double. Their profits fall from 23.5% to 11.6%, as their effective tax bill (on equivalent pre-s24 profits) rises from 26.5% to a whopping 63.8%!
This means that as an otherwise successful professional landlord facing the removal of financing costs and the like as a legitimate business expense; apart from putting up rents and further compounding the tax problem, you have four main options: –
Option 1 – Sell up.
Take the CGT hit and mortgage penalties (if any), and either spend the lot or invest the money elsewhere. Being a landlord is not as easy as it seems, and for some the changes are simply a bridge too far.
Option 2 – Make a positive decision to do nothing.
Investigate the options as best you can and decide to stay as you are, even though that may raise how much tax you pay, lower your disposable income, and leave your eventual heirs a wholly unnecessary IHT bill. That said, don’t expect to get the kind of advice you’ll need for free – any properly indemnified and sector specialist tax professional will charge to establish the facts and their time in advising you. You’re buying what they know, and what you don’t; and it’s how their business makes its profits.
Option 3 – Incorporate.
Transfer your personally held BTLs to a limited company which you own. Much trumpeted elsewhere as the obvious choice, almost without exception it’s an expensive one-way street, that leaves you vulnerable to a hike in corporation tax for property companies, which yours would then be. Moreover, with the ability to get advance clearance for S162 incorporation relief (no CGT or Stamp Duty) no longer available, it could be two years before you know the true cost.
Add to that the need to remortgage every single property plus all the time, cost and restriction of choice, and you may find that it’s even more expensive than S24.
Read more in my piece ‘Landlord Incorporation: Out of the Frying Pan and into the Fire?’
Option 4 – Maximise the commercial benefits of building, running, and growing a professional property business using hybrid arrangements.
This is the generally the only way by which you can successfully counter the punitive tax changes, legitimately reduce your property income tax to basic rate without negatively affecting what you can spend, create a trading business capable of being passed on intact as a going concern, whilst at the same time helping to stop the wealth you create from falling into the wrong hands.
Of course, it is important to remember that the most appropriate solution for managing a property business or portfolio will not always be a hybrid business model, and as always it depends on the exact details of your professional and personal circumstances.
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.
So, will the next two years see the death of the private landlord?
I think not.
What it will mean though is that now that S24 is making its presence felt all red in tooth and claw, and the PRA BTL mortgage changes are too having their intended impact, then the real accidental landlord will have no choice but to leave the market and employ their capital elsewhere.
Those landlords who are capable of embracing the changes, especially by showing BTL mortgage lenders what they need to know, i.e.
- your property investment experience
- the total amount of your mortgage borrowing across all properties
- your assets and liabilities, including tax liability
- the merits of any new lending in context of your existing buy to let portfolio together with your business plan
- historical and future expected cash flow from your portfolio
- your income both from property and elsewhere
will be demonstrably running a professional property business and for sure you’ll be making a valuable contribution not only to you and your family’s future, but to the wider economy and society at large.
Co-Founder of Less Tax 4 Landlords, Tony is a regular contributor here on our blog and across the landlord media in general. Tony has also written for the Daily Telegraph, The Times, Professional Broker, Counter Terror Business and Landlord Investor Magazine. He is a regular industry commentator and panellist appearing with Andrew Neil, Iain Duncan-Smith, Kate Faulkner and David Smith (Economics Editor of The Sunday Times). Not afraid to challenge the status quo, Tony has a track record as an innovator and disrupter including embedding mortgage brokers in estate agents, helping set up the UK’s first mainstream fee-based financial planning business, and co-founding the UK’s first deregulated law firm.
Co-Founder of Less Tax 4 Landlords, Tony is a regular contributor here on our blog and across the landlord media in general.
Tony has also written for the Daily Telegraph, The Times, Professional Broker, Counter Terror Business and Landlord Investor Magazine. He is a regular industry commentator and panellist appearing with Andrew Neil, Iain Duncan-Smith, Kate Faulkner and David Smith (Economics Editor of The Sunday Times).
Not afraid to challenge the status quo, Tony has a track record as an innovator and disrupter including embedding mortgage brokers in estate agents, helping set up the UK’s first mainstream fee-based financial planning business, and co-founding the UK’s first deregulated law firm.
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.