On the face of it Mr Hammond did not do anything specifically to help (or harm) the buy to let sector or the wider housing market. However, he did make a couple of changes that will affect landlords who operate their portfolios either in a personal capacity or via a limited company…
This was Phil the Spreadsheet’s second budget announcement since becoming Chancellor and his one and only Spring Budget. Going forward there will be just the Autumn Budget.
(And those who are in full-time employment but also earn income personally from rental property, i.e. unincorporated portfolios)
From April 2018, Class 2 National Insurance (NI) contributions will be abolished and Class 4 (NI) contributions are set to rise from 9% to 10% for those making a profit exceeding £8,060 but below £43,000. From April 2019, the amount will increase again to 11%.
The Chancellor said that the increase would create more fairness between the self-employed and employees who pay 12% Class 4 contributions.
In reality the impact of the NI changes is complex and depends on whether the individual landlord has operated their buy to let portfolio as an investment, as a business or as a trade. Without boring you with too much detail, since 2015 there has been little (effective) difference between the investment status and the business status, so:
- Portfolio as an investment or as a business: the profit is not subject to compulsory NI contributions. I’m guessing that most landlords fall into this category.
- Portfolio as a trade: NI contributions apply and I would hazard a guess that the increase will be a further incentive to landlords to incorporate. As I understand it your BTL business may be treated as a “trade” if you provide some “added value” services such as a bank of washing machines in a multi-occupancy block. This is clearly something to watch out for and if in any doubt take professional tax advice.
Also, landlords operating under the VAT threshold will now have an extra year before they must send HMRC quarterly updates and maintain digital accounts – now from April 2019.
NB: The above information regard Class 4 NI contributions is now incorrect. On Wednesday 15th March 2017, Chancellor Philip Hammond said the government would not proceed with the increases which were criticised for breaking a 2015 manifesto pledge. In a letter to Tory MPs, he said:
"There will be no increases in... rates in this Parliament."
From April 2018, landlords who run their portfolios through a limited company will see their tax-free dividend allowance reduced from £5,000 to £2,000 per year.
I have produced a spreadsheet (with no assistance from Phil!) to demonstrate the tax impact of the changes in interest relief for individual investors over the next four years – as well showing the impact of incorporation. Inevitably this is a highly complex area and use of this spreadsheet is no substitute for seeking proper professional advice – but maybe it will help you to ask the right questions.
Whilst this reduction will increase the tax cost in extracting buy to let profits from a limited company and as such, is unwelcome, at least these landlords will continue to be taxed on profit. Contrast this with the situation for individual landlords who are taxed on turnover (less costs of management), and the continuing appeal of incorporation remains as strong as ever, despite some unhelpful, and in my opinion, flaky, comments from some quarters which refer to the incorporation route as a “tax loophole”.
This expression is not only incorrect it is also unhelpful – almost goading the Chancellor into taking more action against buy to let landlords. The full utilisation of interest as a business expense within a limited company has been a long-established principle and could not be changed on a whim.
In his speech Mr Hammond said there were lots of good reasons why people chose to either work through a limited company or be self-employed. He even confessed to having done both in his time but said:
"…those choices should not be driven primarily by differences in tax treatment.”
Whilst for many landlords incorporation will be more tax efficient, I doubt that this will be the only reason for choosing this route. Whilst the obiter dictum of Lord Justice Clyde in 1929,
“No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores. The Inland Revenue is not slow, and quite rightly, to take every advantage which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer's pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue"
may have been watered down by subsequent rulings and legislation, the general principle is still maintained. Nevertheless, it is of course imperative that landlords take specialist advice in this matter so that they can take informed decisions on how best to structure their portfolios.
I think that the phased reduction of tax relief on finance costs (including buy to let mortgage interest) over the next four years, was introduced by the government to discourage small “casual” buy to let investment. If the chancellor had planned to introduce a similar penalty to incorporated landlords, he probably would have done it at the same time as he announced the restrictions on individuals.
Whether I am right in my assumption, only time will tell but for now our transaction figures tell us that the majority of landlords purchasing buy to let property now do so in a corporate vehicle (mostly SPVs but some through their trading limited companies).
The rest of the budget was lacklustre. There was no follow up on the Housing White Paper, nor was there any climb down on the stamp duty surcharge - we had not expected there to be; the 3% surcharge is a nice little earner, why on earth would they retract it? Arguably the entire tax code (so far as it relates to investment in property) needs a total rethink as part of a wider housing strategy but for now, the government will stick to tinkering around the edges – there have been enough fiscal and regulatory developments and I’m sure they will want to consider how these impact the market before introducing any further changes.
Want to know more about borrowing via a limited company? or more on how the tax changes to mortgage interest relief will affect landlords? Then perhaps our webinar on Wednesday 5th April would be of interest...
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You may also be interested in:
Buy to Let Tax Calculator
we have devised a spreadsheet to help you calculate your future tax liabilities and work out whether or not you might be in a better position borrowing via a limited company.
FAQs on Ltd Co borrowing for buy to let
Frequently asked questions on limited company borrowing for buy to let mortgages.