2017 Spring Budget: The lowdown for landlords 2017 Spring Budget: The lowdown for landlords

2017 Spring Budget: A landlord’s guide

Kate Faulkner runs through previous budgets before tackling the 2017 Spring Budget and the recent Housing Whitepaper.

This year’s Spring Budget hardly mentioned housing! In fact most of the time housing came up it was part of Philip Hammond’s famous spreadsheets and some references to action taken during previous budgets.

To understand the impact, we need to look at previous budgets. Or you can find out about the most recent budget here.

Summer and Autumn Budgets 2015: Buy-to-let taxes changes and stamp duty rises

Previous budgets have been a game changer for buy-to-let investors. The budget announcements, which are expected to dampen buy-to-let investment, were influenced by two things:

  1. The stark warning from the Bank of England of the dangers of housing bubbles caused by property investment speculation.
  2. The continued battering of landlords accused of preventing first time buyers on the ladder.

This led to three big changes:

  1. An additional 3% stamp duty for properties valued over £40,000 – paid in addition to the existing amount homeowners pay. This increase was specifically for second home owners, who are typically buy-to-let investors.
  2. The loss of 10% wear and tear allowance, though costs can be deducted at the time.
  3. The loss of mortgage relief for higher rate tax payers. This means interest payments and fees cannot be deducted in the same way they’ve been before, resulting in higher tax bills. This change is being phased in from 2017 to 2021.

What the Summer and Autumn 2016 Budgets meant for landlords

After the severe blows in 2015 mentioned above, people hoped that some of those rules would be reversed. That didn’t happen. Instead, in 2016 there were more setbacks for buy-to-let investors in the form of Capital Gains Tax (CGT).

No Capital Gains Tax cut for landlords

The government decided to incentivise people to invest more in financial investments other than property. CGT for property investors remained at 18% and 28%, while for other investments it was lowered to 10% for lower rate tax payers and 20% for higher.

Ban on letting agent fees

The final ‘shock’ to the rental system was a ban on letting fees which was announced with no industry consultation. Unfortunately, as this will reduce agents’ turnover by 10-20%, this means they will need to recoup the money from landlords by increasing fees or cutting costs. This could mean reducing staff numbers, which could affect the level of service landlords receive.

It’s unlikely the ban on letting fees will affect this highly competitive market for property stock and landlord business. But it’s likely that this initiative, combined with the higher costs facing buy-to-let and landlord investors, will mean rents will have to rise.

Commercial property stamp duty changes

Stamp duty for commercial property was reworked, taxing in bands as opposed to the property value itself. For example, the first £150,000 is zero-rated, while anyone buying from £150,001 to £250,000 pays 2% and over that amount 5%.

Investment in infrastructure creates opportunities

There was some good news with investment in more housing and in infrastructure. The latter included HS3 (the planned fast rail link between Manchester and Leeds) and Crossrail 2 (north-east to south-west railway, which would tunnel beneath central London). Both investments could generate investment opportunities for landlords.

The impact of the government white paper

The government housing white paper helped to give clarity to what landlords can expect from the housing market moving forward.

Mainly, the paper supported first time buyers and second steppers by continuing to support the various Help to Buy schemes and also introduced the concept of starter homes.

What was also good news was the acceptance of the private rented sector as a tenure that was ‘here to stay’. Although sadly, the government clearly indicated it would only support large, institutional landlords as opposed to smaller buy-to-let investors. These larger bodies include those investing in major ‘build to rent schemes’ and social landlords, such as housing associations and councils.

But there were two other pieces of good news:

  1. There was a review of the leasehold and freehold relationship, which is often a cause of problems for home owners and investors.
  2. There are opportunities for investment in areas where large levels of infrastructure investment are planned, such as East Anglia, the Northern Powerhouse and the Midlands.

Changes to landlord accounting

As part of the previous and current budget, there are also proposed changes to the way landlords account for their income. In a move to digitise accounts, for those earning more than £10,000, the proposals plan to move accounts from annual to online quarterly filing from 5th April 2018.

Also, there is a proposal to shift accounts to a ‘cash’ based system as opposed to accruals. As with tax, these changes need to be understood via your tax or property accountant.

Understanding the Budget changes for buy-to-let landlords

The main takeaway for landlords from the 2017 budget is that this cabinet seems as determined as the last to curb individual buy-to-let spending. However, there is some good news for landlords in the budget.

Positive economic forecasts

The first is that the economic forecasts are robust. Despite the original fears of Brexit driving prices down by 10-18%, property price and rental growth is predicted to remain positive. Forecasters currently expect property price growth to slow versus previous years. Nationwide predict a 2% increase year on year, which is half the growth of 2015 and 2016.

However, a low growth environment can be good for savvy landlords. They can use the opportunity of a slower market to throw up bargains that allow capital growth to be built in from purchase.

Rise in inheritance tax threshold

Secondly, landlords that have wealth in excess of the current inheritance tax threshold (IHT) of £325,000 (or double for a couple) and own their own home, should revisit wills and inheritance plans. There may be an opportunity to take advantage of the new IHT residence nil rate band. So if someone dies after 6th April 2017 and passes their main residence to direct descendants, from 2017/18, there is an opportunity to secure £100,000 relief rising to £175,000 in 2020/21.

However, this isn’t straightforward and it’s worth taking professional advice to see if it can be applied to your wealth. For example, it doesn’t apply to properties which are valued in excess of £2 million.

Other potential good news

There are other small bits of good news which may be positive for some landlords, depending on your existing earnings and assets.

  • The rise in the personal allowance from £11,000 to £11,500.
  • An increase in tax thresholds for 20% tax payers to £33,500 and 40% taxpayers to £45,000.
  • Savings of up to £1,000 for lower rate tax payers are free of tax.
  • ISA savings remain free of tax up to £20,000.
  • Capital Gains Tax relief increases in 2017/18 from £11,100 to £11,300.

There is also a concession for landlords who don’t earn much income or those who let their own property via the likes of Airbnb. From April 2017 you can earn up to £1,000 not only free of income tax, but you don’t even have to declare it on your tax returns.

Specialist financial advice becoming more important

In addition, depending on how landlords pay themselves — such as self-employed or own a property in a company and are a director taking dividends — further changes were announced which could impact on earnings.

Due to the complex and continued changes to landlord property taxation, as well as how personal income is paid, it’s important to speak to a specialist. You likely need one-to-one tax advice as HMRC will always take into account all of your earnings and assets. For example, any relief or tax thresholds can be affected by things such as the new accounting and tax rules for buy-to-let property income where a mortgage is in place.

Where we are now: The 2017 Spring Budget and the ‘broken’ housing market

Having launched a white paper on the subject of housing just weeks before the budget, there was an expectation more incentives would be put in place to build more homes. There was also a hope that some of the measures to dissuade individual buy-to-let investment put through in previous budgets would be overturned.

Government holds firm on previous budgets

However, there was literally nothing additional budget wise, bar investment in infrastructure and more schools — both of which can boost an area’s popularity. Neither was there a U-turn on stamp duty and the recent mortgage interest relief changes.

Restricted access to housing benefits for young tenants

In addition, a further blow to young, vulnerable tenants was the recent announcement that new claimants aged between 18-21 years old will not have access to housing benefit from 1st April. The exceptions are:

  • if they have dependent children
  • are care leavers
  • are in temporary accommodation
  • have been working for the previous six months
  • or are on the National Minimum Wage working 16 hours a week

This potentially means that less investment in individual buy-to-let and potentially existing landlords selling off some or all of their existing stock. The biggest losers from recent budgets could well be the increasing number of tenants coming into the market.

Rents predicted to rise

As we know from the house buying market, the more demand increases and the less stock is made available, prices tend to rise beyond income growth. Now that situation is predicted for the first time in the rental market.

Savills for example estimate there was an 11% fall in buy-to-let purchases 2016 versus 2015. They also believe purchases will actually fall by up to 25% over the next 5 years. From a rental and price perspective, they’re predicting mainstream rents in the UK will rise by 19% over the next five years, while house prices will rise by just 13%.

Summary: fewer changes ahead mean landlords can plan for the future

Basically the scene is now set for landlords and investors. Apart from a few more changes to come, such as posting accounts digitally on a quarterly basis and continued loss of relief for higher rate tax payers on mortgage costs, landlords now know what to expect. Therefore, they can work out their strategy moving forward.

The housing white paper sets out the government’s support in housing, while there’s also now perhaps a ‘finalised’ budget on housing incentives. Now that landlords have an idea of what’s to come, they can research their local investment areas to understand the impact of these changes on their own existing and future buy-to-let investment.

Kate Faulkner Blog

Added: 22nd June 2017