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In many ways, UK landlords have not been the clear winners from the handouts in the 2020 Budget – or, indeed, from those in the July “Mini Budget”. Tenants have clearly benefited from the new prohibiting on forced evictions during the lockdown. This is welcome protection, of course, for renters who needed housing security during the lockdown. Yet it has also led to some sad, frustrating cases where renters have refused to pay rent whilst continuing to occupy the property – causing many landlords (e.g. young parents with a Buy To Let) to experience severe financial strain.
One aspect of the July 2020 Mini Budget which may help landlords, however, is the new stamp duty “holiday” offered by the Chancellor. This could offer the opportunity to save on tax, recouping some of your losses from missed rent (if that’s your situation) and/or build up a bit of a “rainy day fund” to keep your property investments afloat if further trouble comes to the UK economy down the line – such as a “second wave” of COVID-19 in the winter.
We offer these thoughts to landlords on this subject to assist. We hope you find this content helpful, and invite you to contact our team here at Cedar House for more information or to access personalised financial advice:
020 8366 4400 or enquiries@cedarhfs.co.uk
Landlords and the Stamp Duty Holiday
To briefly recap, the stamp duty holiday was announced by Chancellor Rishi Sunak in his July 2020 Summer Statement, and will run until the 31st of March 2021. It was launched to help boost growth in the UK property market, which had ground to a standstill during the lockdown since March. According to the government’s own figures, the new measure could mean that only 10% of property transactions may be subject to stamp duty in the coming months.
In London, for instance, the average stamp duty bill could fall by £4,500. The tax holiday seems to be geared primarily towards ordinary homeowners – encouraging people to move house as they would have done before the pandemic arrived. However, the stamp duty holiday could also be leveraged by landlords to save on their own tax bill.
How, exactly, can landlords do this? By setting up a company structure and moving their properties into it. According to one study, there are at least 2.7m properties in the UK which are owned by landlords. Approximately 24% of this market own their properties within a company structure – with the rest holding them in their own name. Yet scope exists for many of these in the latter group to move into a company structure, possibly saving hundreds in tax.
Pros & Cons to Consider
Landlords have been subject to increasingly stringent tax rules in recent years. The expenses which they can offset against their tax bill have been steadily shrinking, and only 20% tax relief can now be claimed in 2020-21 for mortgage payments and similar costs (regardless of your income tax bracket). This harder tax environment for private landlords has led many to consider moving their properties into a company structure, due to the more attractive tax laws.
Doing so would normally trigger a capital gains tax bill and stamp duty liability. Yet, with the new stamp duty holiday, many landlords have a rare window of opportunity to move some of their properties into a company structure at lower tax charges.
According to one recent study, a typical UK landlord might hope to make £6,516 net profit per year if their property is in their own name. Yet holding it a company structure could lead the same property to yield a £7,371 annual profit. This partly down to the difference in tax rates in 2020-21, where 40% would be levied on a Higher Rate taxpayer yet 19% would be levied on the profits of a company.
Yet it’s important for private landlords to not simply rush into setting up their properties within a company structure. This is an important financial decision with longstanding implications, and it may not always be in your best interests. For instance, mortgage rates offered by lenders to companies tend to be higher than those offered to private landlords. Yet, in certain cases, this could be offset by the greater rental yield you might expect to achieve.
Usually, you will need to set up the company for your property before you submit an application to transfer ownership into it. A wide range of documents are involved during this process, and it will be important to consider these carefully and fill everything out correctly. Running a company is also a big commitment with lots of tax responsibilities, which you need to take into account.
It will be a good idea to weigh up the various pros and cons of potentially moving your property into a company with an experienced financial adviser. This professional will be able to help you properly evaluate the options with you, based on the best available information.
Invitation
If you would like to discuss your property or financial plan with a member of our team, then get in touch today to arrange a free consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk.