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The recent Mini-Budget has certainly stirred a reaction; admittedly, much of it negative. Yet the announcements do contain some good news for Buy to Let (BTL) and other property investors. Below, our financial planners at Cedar House highlight three welcome tax changes from the new Chancellor that could bear upon your portfolio. We hope this is helpful to you. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
020 8366 4400 or enquiries@cedarhfs.co.uk
#1 Stamp duty tax
Buy to Let (BTL) investors have not had a tax break from the government in years. In fact, the regulation and profitability of BTL had been tightening (e.g. banning no-fault evictions and taking away a landlord’s ability to claim mortgage interest tax relief). Indeed, this situation had led increasing numbers of BTL landlords to sell their rental properties in favour of commercial investments instead. Yet with the new Mini-Budget, the tide may be turning.
Landlords can now take advantage of a higher nil-rate threshold for stamp-duty tax. In England and Wales, this has doubled from £125,000 to £250,000 (although there is still a 3% surcharge on additional properties). For an investor buying a property worth £250,000, therefore, this tax change effectively means a £2,500 reduction in their stamp duty bill (from £10,000 to £7,500).
#2 Corporation tax
Plenty of landlords own their BTL property in their own name, meaning that any rental income from tenants falls under their income tax bill (and any future profit from a sale may be subject to capital gains tax). However, 296,000 people instead choose to hold them in a limited company structure, where profits are subject to corporation tax.
For these landlords, the Mini-Budget has good news. The previously-planned rise in corporation tax – from 19% to 25% on profits over £50,000 – has been cancelled. An incorporated landlord receiving £250,000 per tax year in rental profits, for instance, could now save £15,000 a year in corporation tax.
#3 Dividend tax
Profits from BTL properties held within a limited company can be distributed to shareholders through dividend payments. In April 2022, dividend tax increased by 1.25% across all three tax bands to help pay for the rising costs of social care and the NHS. The latest Mini-Budget has now cancelled this measure, bringing the Basic Rate back down to 7.5%, the Higher Rate down to 32.5% and the Additional Rate down to 38.1%. For BTL investors, this is another win as they can now keep more of their taxable dividends. Bear in mind that the £2,000 annual tax-free dividend allowance also remains in place, so investors can also mitigate taxes further through a prudent tax plan with their financial adviser.
Words of caution
Many landlords are likely to welcome these tax changes, and those who were thinking of leaving the sector may now keep their property investments for longer. However, there are still obstacles in place which the Mini-Budget has not addressed. No-fault evictions remain in force and landlords are still unable to claim mortgage interest tax relief. Non-incorporated landlords whose income falls into the Higher Rate of income tax may benefit slightly from the planned Basic Rate tax cut to 19% in 2023, but not by much.
Additionally, landlords still must wrestle with tightening rules about energy efficiencies in their properties. The bill making its way through parliament currently states that all new tenancies must have an energy performance certificate (EPC) rating of at least Band C from 31 December 2025. One survey suggests that 68% of respondents own properties rated D or lower, meaning that they will need to fork out to improve their EPC rating – or, abandon their investment(s).
BTL investors also face soaring mortgage interest rates once their fixed-rate deals expire as the Bank of England (BoE) keeps pushing up the base rate to try and tackle the rising cost of living. The base rate now stands at 2.25% (up from its historic low of 0.10% at the end of 2021) and is likely to rise further in the coming months, possibly to 6% by early 2023. Higher mortgage costs will, naturally, eat into landlords’ rental yields from BTL tenants and could force many to sell their investment(s) to prevent a loss.
Conclusion
The Mini-Budget brings some good news to BTL investors. However, the wider macroeconomic backdrop (particularly rising interest rates) could offset many of the advantages contained in the Chancellor’s announcements. With the current uncertainty in the UK property market, it is ever more important to seek financial advice about your current – or planned – property investments, to make sure these are sustainable and productive towards your overall financial goals.
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk