Buy to let residential properties are among the most popular investments but it has become increasingly clear that successive governments have targeted them for tax purposes.
In the last decade there have been a number of tax reforms in this field which have reduced its attractiveness for investors.
To be clear, not all of these will impact every private landlord.
Stamp Duty Land Tax (SDLT) increases
There have been three changes to Stamp Duty Land Tax (SDLT) in the last decade which have effectively increased its level of taxation. Firstly in 2014, the government abolished the “slab” approach to SDLT, which previously meant that a single tax rate was paid on the entire purchase price, to a “slice” system, whereby the SDLT rate is incrementally increased as the purchase price rises.
Whilst this removes cliff edges in terms of percentage paid on purchases and left the total SDLT unchanged for residential properties from £125,000 to £935,000, it raised the levy on properties above £935,000.
For instance, under the new system a landlord would pay the following SDLT rates:
|
Property value |
Basic SDLT rate (%) |
|
Up to £125,000 |
3 |
|
The next £125,000 (£125,001 to £250,000) |
5 |
|
The next £675,000 (£250,001 to £925,000) |
8 |
|
The next £575,000 (£925,001 to £1.5m) |
13 |
|
The remaining amount (above £1.5m) |
15 |
Since 2016, those purchasing a property for £40,000 or more (or part of one) in addition to any already owned, are subject to an extra 3% SDLT – the figures shown in the above table are 3% higher than if it were a residential property.
This additional levy was increased further for overseas buyers in 2021, by 2%, meaning that an overseas buyer purchasing an additional property in the UK faces an extra 5% SDLT. This tax applies even if the overseas buyer owned no other properties in the UK before the purchase, as overseas properties are accounted for.
Tax reliefs reductions
Arguably the area that has done the most to reduce the attractiveness of buy to let properties is the removal or reduction of several, previously generous, tax reliefs for landlords. Since April 2017 the mortgage interest tax relief landlords could claim has been phased out for higher rate taxpayers, with now only the equivalent to basic rate payers’ relief remaining. This has impacted higher rate payers significantly, as they can now only receive a tax credit of 20% (the basic income tax rate) whereas previously they could claim 40% (the higher income tax rate) tax relief on mortgage payments.
One in three landlords have considered selling rental properties due to the loss of mortgage interest tax relief, according to a survey from Nationwide.
At the same time this was announced, the government also stated that non-domiciles who had purchased UK residential property through offshore companies would be required to pay Inheritance Tax (IHT) on them. Before this change, this type of purchase avoided any Inheritance Tax. Inheritance Tax is now also applied retroactively, levied on any structures set up before April 2017.
A year earlier, in April 2016, the automatic “Wear and Tear” 10% allowance was removed. This was replaced by the “Renewals Allowance”, applying only for fully furnished properties and the actual cost of replacing furnishings, fixtures and fittings on a like-for-like basis. The new system is a far less valuable allowance for most landlords in most years.
April 2016 also saw changes to the lettings’ relief, which was worth up to £40,000 per owner (I.E., £80,000 per couple). This had been available when a property had been rented out at some point during the period of ownership, but not for the whole period. While this relief remains available in name the terms have been tightened significantly, and this is now only applicable where the owner of the property has been living at the property with their tenant - in effect, abolishing this relief for most landlords.
There has been a significant watering down of the final years’ relief, whereby landlords can claim an exemption from capital gains tax. Previously this applied to the last 36 months of ownership, even when the owner had not occupied the property during the period. This time period has subsequently been reduced twice, first to 18 months and from April 2016 to just nine months.
Less favourable treatment
To accurately assess the value of any investment, it should be considered relative to alternative options. In this regard, some of the taxes on investments in others asset classes are lower than those levied on buy to let properties.
Since April 2016, non-residents disposing of UK residential property have been subject to UK Capital Gains Tax (CGT). However, for shares and mutual funds, non-residents continue to not have to pay this tax.
Along similar lines, for UK residents there are different tax rates when it come Capital Gains Tax on buy to let property compared to shares and mutual funds. The CGT rate for shares and mutual funds are 10% or 20%, whilst landlords suffer significantly higher rates of 18% and 28%.
Planning for inheritance tax related to residential property is also a complex matter. Holding out on a sale until death may alleviate an 18% or 28% Capital Gains Charge on profit but expose the full value to Inheritance Tax at 40%. Those with a substantial amount of their wealth in property that are tax savvy will recognize the tax advantage of selling with an 18% or 28% liability on a smaller gain earlier, to remove the potential of a 40% liability on the full value upon death.
From an investment principles perspective, liquidity and diversification should not be ignored while rising interest rates mean the cost of finance may also negatively impact overall returns.
A well-diversified and professionally overseen portfolio of equity, debt and alternatives, perhaps involving trusts and assets benefitting from Business Relief (and potentially combining the two in the same element of planning) can meet many investors post tax investment return objectives.
Some Buy To Let Mortgages are not regulated by the Financial Conduct Authority
Tax treatment varies according to individual circumstances and is subject to change.