November 16 – Bring me a fairer tax system
The last year has seen an onslaught against the private rental sector landlord. There was broad consensus at the end of 2015 between government, the Financial Policy Committee and the Bank of England that steam should be taken out of the private rented sector. First there was the 3% stamp duty hike on second or subsequent properties. This caused a significant volume of purchases to be dragged forward into the first quarter of this year, followed by transaction levels recovering in quarter 3. Whilst this was a tax raising measure, it has caused landlords to carefully consider their acquisitions.
Next there was the change in how the income from rentals is taxed as it is now added gross to other income. Also from April 2017, on a phased basis over 4 years, interest and other costs can only be off-set at the basic rate of tax and the general wear and tear allowance has been withdrawn. As this is being phased in it will take time to bite. However landlords are becoming increasingly aware of this change in their costs and it will impact on investment decisions. Landlords have a choice of accepting reduced profitability, loss making rentals, or increasing their tenant’s rents. Selling up is another option, but despite the rhetoric it has to be hoped this is not the result.
We also have new stress rates on lending to be followed by more exacting underwriting standards. By January 2017, all lenders must introduce new credit assessments on affordability that take into account potentially higher repayments due to future interest rates rises. The final change is that from September 2017, all portfolios with 4 or more properties must be assessed in aggregate on a total income and costs basis.
All of these changes come at a time when the clear need is for more houses in the private rented sector. Given that we have been at an all-time low in interest rates, house purchase is relatively cheap. When rates increase, renting will look more attractive, unless rents rise too. So the pressure is on the Chancellor when he stands to deliver his Autumn Statement. Landlords are predominantly long term investors who understand the need to provide good homes and protect the value of their asset. These changes mean that landlords need to take professional tax advice on what might be the best approach to minimising their liabilities in future. They could avoid many of the changes by dropping their new assets into a limited company vehicle. This, however, adds significant layers of complexity particularly in how to get value out in later life and on generational transfer.
Many industry commentators see some sense in the Stamp Duty change to assist the first time buyer, the need to stress test loan affordability to ensure this is a level playing field on funding, and finally to look at larger portfolios in the aggregate. However the changes to income tax lands heavily. This new government should look at reversing these changes recently introduced as a first step to introducing a more coherent housing policy in the long term.
In addition the 5% payable above £250,000 property value and the 10% payable above £925,000 are significant drags on transaction levels in the UK. The previous government raised duty levels to a point where the amount payable has become a barrier to moving home. People are not keen to give that much of their wealth away to the government just to move house. Rates need to be reduced to stimulate the property market.
Chief Executive, AMI