New Landlords Tax – What is it?
A serious tax hike for most property owners, including Buy-To-Let landlords, has been snuck into the Finance Bill, with no publicity or announcement of any kind.
We talked back in March about the raft of measures being introduced to increase taxes on rental income.
But it’s about to get a whole lot worse.
What have they done?
The effect is to subject the profit on most residential property sales to income tax, rather than capital gains tax.
This will increase the tax on the sale of residential property, from rates of 18% and 28% (under CGT) to 20%, 40% or 45%. And there will be NI contributions of 9% and 2% in addition.
Owners of commercial property will fare even worse, as CGT rates were reduced to 10% and 20% on 5 April.
And there are additional implications (none of them favourable) in terms of loss of personal allowance, child benefits and pension contributions.
What types of property are affected?
Property held by individuals where “one of the main purposes in acquiring the land was to realise a profit or gain from its disposal”.
That covers just about everything.
Main Residence rules are not affected but that is a small comfort.
Corporate landlords are also not affected, this measure only applies to individuals.
The government is using its standard justification for increasing taxes: to tackle tax avoidance. This time by overseas landlords.
It’s just a coincidence that so many ordinary citizens (the electorate!) are caught in the cross-fire.
When will this take effect?
Well. First of all, a tiny glimmer of hope. The bill has not yet become law. It will be discussed in the House of Commons on 5 and 6 September. So you can lobby your MP.
But if it goes through, then all transactions from 5 July 2016 will be subject to it. This is particularly insidious as, not only does it not give people a chance to ‘tidy up’ their affairs before the law comes into effect but it also means that people who have sold property in the past couple of months could be hit with a tax that neither they nor anyone else was aware of.
Should you use a company to manage your properties?
This measure appears to strengthen the case for managing property through a limited company.
Not only are company profits taxed at the relatively benign rate of 20% (and falling) but companies can use an indexation allowance, which means the cost of the property is adjusted for inflation, reducing the taxable profit when it is sold.
Transferring properties you already own to a company can be expensive as there are potential complications with stamp duty and I have not seen any guidance as to whether HMRC would seek to tax the latent profit in the property transferred to the company as income.
Is there anything you can do to stop it?
Lobby your MP.
According to the Law Society, it could all be a matter of unintended consequences but it is concerned about the manner in which these changes were introduced, without consultation or scrutiny. You can see their response here.
Stealth tax increases have been resisted previously but once the act is on the statute books, it is much more difficult to do anything about it.