How will the changes announced in the 2021 Spring Budget impact buy to let landlord and property investors? Chief Operating Officer, Gavin Richardson, explains the key points included in today’s announcement.
With more than £350 billion borrowed to provide emergency financial support to individuals and businesses through the Coronavirus pandemic, the UK Government has got to start raising funds to repay this debt at some point. Of course, taxes are the most efficient way to do so, as just small percentile changes can quickly produce significant returns.
Amongst rising unemployment and ongoing financial struggles for businesses and individuals alike, severe measures in this budget would be detrimental, no, catastrophic, for an economy that has barely started recovering. Still, it has to start somewhere.
Capital Gains Tax
This has turned out to be “the dog that didn’t bark” as despite considerable speculation of an increase in Capital Gains Tax (CGT), the Chancellor, Rishi Sunak, made no mention of it in his budget announcement. Last November, the Office for Tax Simplification (OTS) cited CGT as a possible target for reform in order to help recoup the money needed to repay the Government’s growing COVID pandemic debts.
CGT is paid on the profit (the difference between the initial invested value and the asset’s new value) when selling investments not held in an ISA or pension scheme, including second homes/residential investment property. While not an immediate concern for many, the fact that CGT will remain at 18% for standard-rate and 28% for higher-rate taxpayers will come as a relief to many landlords. In particular, those of you either looking to sell and cash in property investments or incorporate personally owned property (thereby selling property to their limited company).
Corporation Tax will increase from 19% to 25% as of 1st April 2023. Even then, the 6% increase will only apply to businesses where profits exceed £250,000. While the finer details are not yet available, we know that businesses with profits up to £50,000 will remain at the current 19% tax rate, with increments in between where companies will be probably be taxed at a rate of 26.5%. It’s estimated that about 1.5 million smaller businesses will remain at the current 19% rate.
With so many businesses financially impacted by the pandemic, it would have been counter-productive to the economy’s recovery to increase this any further. While the Government is keen to start repaying the eye-watering debt caused by COVID support measures, now was not the time to sting businesses with a considerable increase in the tax on their profits.
How Does the Corporation Tax Increase Impact Landlords?
If you own buy to let property via a limited company, you will pay Corporation Tax on your company’s profit. For those landlords in the high-rate income tax band (£50,001+ annual income), the lower rate of Corporation Tax is part of what makes limited company investment structures more tax-efficient than investing as an individual.
While this increase will, of course, impact profits for some limited company landlords as of 2023, the increment-based approach means that the majority will see no or only a slight increase in two years’ time. It’s worth remembering that the UK has the lowest Corporation Tax rate of the G7 countries and this is likely to remain so even after this increase. Corporation tax in the US currently stands at 27% (something that Joe Biden has said he's looking to increase), France's rate is at 26.5%, Germany's at 30%, Canada at 26.5%, Japan at a very precise 30.62%, and Italy at 24% - and these rates are before the other G7 countries start to repair their own fiscal “black holes”! Corporation Tax has been steadily decreasing for the last decade; some of you may remember that in 2010, Corporation Tax was 28%!
Any other changes to Corporation Tax?
For the next two years when businesses invest in new equipment they can offset all of the cost against tax, plus an additional 30%. Whilst there is no detail available about the operation of this scheme it is most likely that this will mean an uplift in the Annual Investment Allowance. It is unlikely that this will have any significant impact on most landlords.
Stamp Duty Land Tax
The Stamp Duty Land Tax holiday in England is extended from 31st March to 30th June 2021 at the current threshold of 0% up to £500,000. From 1st July to 30th September 2021, the 0% threshold will reduce to £250,000, still double the existing standard threshold of £125,000.
The extension comes as a massive relief to many currently purchasing property and hoping to benefit from the potential £15,000 tax saving on offer. According to Rightmove, an estimated 100,000 people could have faced an unexpected stamp duty bill without this extension. The combination of high volumes of mortgage applications and health and hygiene requirements have caused severe delays as lenders, surveyors, solicitors, and local authorities struggle to keep up with the demand.
How Will the Extension to the Stamp Duty Holiday Impact Landlords?
It appears that this extension applies to everyone, and not just those already with a mortgage offer, as many speculated. That said, it’ll still mainly benefit landlords currently trying to complete either a new property purchase or incorporation purchase. However, I’m sure some of you may now be tempted to get in on the action.
As I doubt we’ll see the sudden rush to market experienced back in July 2020, we hope that the extension will give breathing space to lenders, surveyors, solicitors and local authorities. Hopefully, this will significantly reduce the delays many of you have experienced in recent months when applying for property finance. Therefore, regardless of whether the stamp duty tax saving is of any consequence to your investment plans, this extension will be to the benefit of all currently purchasing and remortgaging residential property.
What about transaction in Scotland and Wales?
We will have to wait to find out whether Scotland and Wales decide to extend their tax “holidays” on property transactions.
95% Loan to Value Government Guarantee Residential Mortgages
While the finer details are not currently available, the Chancellor did confirm that several big lenders will back the Government’s 95% loan to value (LTV) mortgage scheme for first-time buyers. A consequence of the pandemic has been that many lenders reduced their maximum LTV to 90%, meaning that many first-time buyers have been unable to get onto the property ladder. We’ll update you with details as they’re released.
If this has ignited your investment plans and you want to talk through your mortgage finance options with an expert, call our team on 0345 345 6788 or email email@example.com today.
While we can offer property finance advice, you must speak to a professional tax adviser for any tax-related queries relating to your investment plans.