It’s that time again.
The dust has hardly settled from the Autumn Statement, yet we are less than a month from George Osborne dusting off his red box and delivering Budget 2016.
In case a reminder is necessary, last year the Chancellor announced a number of massive blows to the private rented sector (PRS), the most significant of which were the ‘restriction’ of mortgage interest relief from next year, and a higher rate of SDLT for additional properties from April.
The policies, attacking stock and flow respectively, are set to have major impact on the PRS as our recent quarterly survey has shown – Landlord confidence has collapsed to an all-time low. To add a little context, this means that confidence is lower than during the financial crash of the last decade, and of any point during the ensuing crunch.
We estimate that 500,000 properties are likely to be sold off by landlords in the next year due to Osborne’s recent changes (if landlords follow through with their stated intentions), with the possibility of another 100,000 sold off each year while the changes bed in.
Our concerns were echoed by the Treasury Select Committee that recently published a report on the Autumn Statement.
Frankly, at this point we don’t know. The contents of the Chancellor’s Budget statement are perhaps the most carefully guarded of any government announcement, with leaks controlled very much by those at the top.
March 16th will see George Osborne deliver his 2016 Budget, and while we wait to find out if any more attacks are coming our way, we have been very vocal in setting out our proposals for changes to the PRS that he should make.
The basis for our pitch is simple: rationalise the tax system for landlords and actually treat their businesses as businesses.
Landlords provide a service by way of business and current tax arrangements, especially the recent policy changes, completely misunderstand this position. The Treasury and HMRC have long had a confused view of landlords and, as a result, the sector has suffered a disparaging lack of consistency for many years.
With the PRS playing such an important part in the UK’s housing mix it is important, now more than ever, for the Chancellor to finally recognise landlords’ businesses as such and tax them accordingly.
Capital Gains Tax (CGT)
Landlords can face a significant CGT bill whenever they sell part of their portfolio which has appreciated in value. Upon disposal of many business assets, businesses are able to claim ‘roll-over’ relief against CGT provided that the gain is reinvested in the business.
However, residential property investments are not treated as business assets, meaning landlords do not have the same access to this ‘roll-over’ relief. This reduces the flexibility of the PRS and reduces the ability of landlords to adapt to changing markets, recover from potentially poor investments, invest in improving their properties and provide housing where it is most needed.
The NLA is therefore lobbying for a change in policy so that landlords can sell property and reinvest the funds without being presented with a significant CGT bill.
In addition, we are also discussing various means of tapering CGT liability for landlords in order to recognise the value of their management of an asset for a prolonged period, and to provide a genuine distinction from property speculators.
Barriers to incorporation
Until recently, a large proportion of portfolio landlords have chosen not to incorporate their businesses – mostly for good reason. However, the policy announcements by the Chancellor have prompted some movement on this. In our latest quarterly member survey, 4 in 10 landlords are either currently moving, or at least considering moving their buy-to-let portfolios to a limited company.
However, as residential properties are not classed as business assets, landlords can face a hefty CGT and Stamp Duty Land Tax bill when transferring property to their new limited company. The NLA believes that HMRC should have a clear and consistent policy in place for landlords incorporating, and remove the financial barriers in doing so by treating their residential properties as business assets.
The incorporation of a larger volume of lettings businesses would be beneficial for the Government as well as landlords, as it would aid in their objective of improving the professionalism and visibility of private landlords, as well as fuelling the growth of small businesses.
For the majority of residential let property, the Council Tax liability falls to the tenant. However, in regard to Houses in Multiple Occupation (HMO) landlords are liable and Council Tax can become a significant issue.
Depending on a number of conditions, local authorities and the Valuations Office Agency (VOA) can differ in how they regard HMOs which means that HMOs may be deemed either as a single dwelling or a number of separate units.
Furthermore, the discounts and exemptions available to landlords during periods of refurbishment or between tenancies can vary significantly. This can complicate the matter of liability for landlords and lead to an inconsistent cost base between localities.
The NLA is lobbying Treasury, along with HMRC and the VOA, to examine this issue and provide guidance to local authorities requiring them to take a consistent approach in the way they administer this tax.
The NLA is talking to Treasury on these and a number of other issues ahead of the Budget and will post more details here during the run up to 16 March.