Spring Budget update for landlords

On 6^th March, Chancellor Jeremy Hunt presented his Spring Budget to Parliament, laying out the latest economic forecasts and announcing various funding and taxation changes.

Tax was a big area of interest for most people, given that we’re currently being taxed more highly than ever before.

And the Government seems to have realised that with this possibly being the last budget before the General Election, they needed to make an effort to win back some support.

For landlords, there was important news in three key areas:

1. Economic forecasts

These can influence both the property market at large and the costs of letting for landlords – and there was positive news.

The general economic forecasts suggest that the UK is returning to more ‘normal’ growth, after the initial shocks of the pandemic and the war in Ukraine.

So, although we’re not quite out of the woods, the biggest positive take away from this budget was that inflation is forecast to fall to its long-term target of 2% much sooner than expected - in the next few months.

When inflation is low – and as long as it’s predicted to stay low – that tends to give the Bank of England confidence to drop the base rate.

And when that happens, mortgage lenders usually follow suit fairly soon afterwards and bring interest rates down for borrowers. This is great news on two fronts:

1. For all those needing or wanting to remortgage in the next 12-18 months, a fall in rates could significantly reduce their monthly payments. That’s particularly positive news for landlords who have ended up having to move onto a much higher-rate product in the last couple of years or are yet to remortgage off low rate deals.
    
2. If mortgage rates can get down to around 4%, that should help the property market get back to its normal level of 1.2m transactions each year.  Although nobody is forecasting huge increases in prices, as long as they can rise at or slightly above inflation (roughly 2-4%), that will mean properties owned outright will hold their value and those with mortgages should see better returns.

2. Changes to property tax

​Property tax changes can either boost or harm landlords’ returns, and we were hoping for some good news here.

1. Multiple dwellings relief

Currently, when investors buy more than one property at a time in the same transaction or linked transactions, they can claim stamp duty relief.

In simple terms, it averages out the price per dwelling, which means that if you buy more expensive properties at the same time as cheaper ones, you can reduce the amount of purchase tax you pay. (The higher rate of 3% for additional properties still applies to the whole purchase price.)

For example:

If you bought three flats at the same time – two at £300,000 and one at £150,000 - without relief, that would mean £50,000 of each of the more expensive flats would be liable to Stamp Duty at 5% = £5,000.

But the multiple dwellings relief means each flat averages out at £250,000, which is below the Stamp Duty tax threshold, meaning a saving of £5,000.

Jeremy Hunt explained that the Government was scrapping the relief because, although it had been intended to encourage investment in the Private Rented Sector (PRS), they found it was being abused.

Relief will no longer apply to transactions that complete from 1^st June 2024 – except in cases where contracts were exchanged on or before 6^th March. As long as there are no changes to the terms of the contract, buyers can still claim the relief, regardless of when the transaction completes.

2. Furnished holiday let relief

There are currently two benefits for landlords who rent out furnished holiday accommodation:

• The full cost of mortgage interest can be deducted from rental income (unlike with standard residential lets)
• If they qualify for Business Asset Disposal Relief, Capital Gains Tax is payable at just 10% when the property is sold.

Both these will be scrapped from 6^th April 2025, although those letting through a limited company will not be affected by the mortgage interest deductions.

Capital Gains Tax (CGT) for higher-rate tax payers is dropping from 28% to 24% from 6^th April this year

This was an unexpected announcement and a nice surprise for property investors as it will help offset the reduction in the personal CGT allowance. Last April, that was cut from £12,300 to £6,000, and it will drop to £3,000 from 6^th April this year.

Here’s an idea of how this rate drop will benefit landlords in real terms:

If you’d sold in the 2022/3 tax year with a capital gain of £50,000:

Less personal allowance of £12,300, £37,700 x 28% = £10,556 CGT payable

In the 2023/4 tax year:

Less personal allowance of £6,000, £44,000 x 28% = £12,320 CGT payable

If you were selling this coming tax year without the reduction:

Less personal allowance of £3,000, £47,000 x 28% = £13,160 CGT payable

With the new tax reduction:

Less personal allowance of £3,000, £47,000 x 24% = £11,280 CGT payable

So, you can see that even though you’ll still be paying more tax this coming year than you would have in 2022/3, you’re paying less than in 2023/4, even with the personal allowance cut.

The Chancellor said this move was being made to encourage more investors to sell, which they hope will increase the number of properties for sale and make more homes available for first-time buyers.

3. Changes to personal tax

How income, benefits and spending are taxed can either improve or reduce your overall earnings and these announcements should benefit some if not all landlords:

1. The threshold for registering for VAT has been increased from £85,000 a year to £90,000.
2. Following the cut to National Insurance announced in last autumn’s budget, this tax has been reduced again. Contributions are falling from 10% to 8% for employees and from 8% to 6% (a slightly smaller drop in real terms) for the self-employed, which is what landlords tend to be.
3. The threshold at which earners with children start to lose child benefit is being raised from £50,000 to £60,000 from 6^th April this year.
4. Duty on fuel and alcohol duty will continue to be frozen until February 2025.

And for those with some spare capital, a new ISA dedicated to UK companies will be made available to investors. This will be a separate £5,000 annual allowance, on top of the existing £20,000 ISA allowance.

The consultation period for this UK ISA is currently running until June, so more details and a launch date should be announced some time after that.

Overall, was this latest Budget good or bad news for landlords?

This depends on your personal circumstances. For example, if you switched to furnished holiday lets because you were struggling to make money in the long-term rental sector, this will be worrying news initially.

However, with potentially lower mortgage rates on the horizon and the recent rises in all rents, it may make switching back to long term rentals profitable.

And if you’re one of the many earning over £50,000 that have lost child benefit, you should see some of that restored in the coming months.

Of course, there are a lot of different factors that can affect your tax liabilities. So, after every budget, it’s well worth talking to a property tax professional, who can explain the implication of any upcoming changes for you and your property investments, according to your own personal circumstances.

You can read the full list of tax changes in the Spring Budget on the GOV.UK website.

 

If any of these announcements mean you’re now thinking about selling or buying investment property, come and speak to the Buy to Let experts in your local branch.

They can talk through your plans and help you decide on the best route forward. And, of course, our sales and lettings teams are always here if you’d like to discuss the current market and get an up-to-date sales or rental valuation.

Book a free rental valuation