3 ways Landlords Can Out manoeuvre Tax Hikes
How are landlords to contain the damage from rises in tax?
It’s never fun to feel that the Chancellor of the Exchequer has singled you out as the latest cash cow to be milked for the general benefit, but that is how buy-to-let landlords are feeling at the moment. Last year’s budget put an extra 3% on stamp duty for this sector. Until the new regulations came into force, anyone buying a property for up to £125,000 paid no stamp duty at all. Now, they pay 3%. That scarcely affects our customers, because unless you’re thinking of investing in a phone box (to attract Doctor Who as a tenant, perhaps?) there isn’t much you can get inside the M25 for £125,000, but all the other bands went up by 3%, too.
Changes have also been made to the way tax relief operates. The intention of those tax relief changes, according to the then Chancellor, was to reduce the amount of money HMRC gives to landlords. But HMRC does not give money to landlords, because HMRC is a government body and the government has no money except what the taxpayer gives them. What the Chancellor actually meant was that the changes in tax relief would result, not in more money being given to landlords, but in more money being taken from landlords. The question landlords must ask themselves is: what can I legally do to keep the Chancellor’s depredations to an absolute minimum?
Form a limited company?
Interestingly, while the tax hit on individual taxpayers was being increased, life was made easier for limited companies. In 2017, the rate of corporation tax will be reduced to 19%. In 2020, another 1% will be cut from it. Setting up a limited company and transferring the property or properties into it will do nothing to change the stamp duty charges. Nothing will change that, but it will mean paying corporation tax instead of personal rates of taxation and, for almost everyone, that will mean paying less tax. The government could hardly complain. A number of politicians have themselves formed limited companies into which they channel earnings from after-dinner speaking, consultancy, and freelance writing.
Get out of the landlord business?
If converting yourself into a limited company seems a big move, actually selling your property portfolio would be an even bigger one. There’s no question, though, that some will take it, or at least will dispose of any properties that give an unsatisfactory return on investment to free up the money to buy something with a better return. (And, to anyone who has poorly yielding properties who wasn’t already thinking of doing that, we would say, why not?)
Do it soon, though, because from 2019, you’ll have to cough up your Capital gains Tax money to HMRC in 30 days instead of the 21 months you’re allowed at present.
Raise the rent?
Increasing rents in most London areas is not going to be easy. For some of your tenancies, the legislation that exists to protect tenants is likely to prevent you from doing so at all. What you could consider is moving into areas that are right for regeneration. If you look at how values in Islington and Brixton have taken off in recent years, it may seem the train has already left the station, but there are still areas inside and immediately outside the M25 where there is scope for refurbished properties to move some distance up the rental value chain.
That is not, though, something you want to take on without advice. This is our field, the area where we consider ourselves to be expert.