On 3 March 2021, Rishi Sunak delivered his second Budget. It was more about spending than tax, but did include news of some tax changes and increases.
Because property is so important to the UK economy, it continues to feature in almost every fiscal announcement from the Government. This Budget was no exception.
The most significant announcement for landlords, especially those in England and Northern Ireland, is probably the extension of the stamp duty land tax holiday (SDLT) initially intended to expire at the end of March 2021.
It now runs until the end of June, with the nil-rate band for residential property before SDLT is due continuing to be set at £500,000. Then, from 1 July to 30 September 2021, the nil-rate band threshold will be at £250,000. After that, it will revert back to the old £125,000.
This is good news for those who, with the best will in the world, weren’t looking set to conclude planned property purchases before the end of this month.
Between COVID-19 restrictions slowing everything down, mortgage providers and banks being overwhelmed and the general heat in the UK housing market, it’s been more challenging than usual to complete.
Now, with more room to breathe, those transactions can run their course – and there might even be time to get more under the wire as lockdown eases – saving landlords thousands of pounds in the process. With the threshold at £500,000, we’re talking about a potential £15,000 saving. When it drops to £250,000, that saving could still amount to £2,500 – worth having but a bit less exciting.
It’s worth noting, too, that property investors still have to pay the 3% stamp duty surcharge on buy-to-let properties throughout.
Mortgage guarantee scheme
We got excited when we heard talk of government-guaranteed 95% mortgage loans for property purchases up to £600,000. Unfortunately, these will only be available for first-time buyers, not those buying-to-let.
Reading between the lines, our impression is that this is a government that instinctively supports landlords and believes in investing in property. Many of those on the benches in the House of Commons are landlords themselves.
At the same time, it’s also trying, as Rishi Sunak put it in his speech, to encourage “generation rent to become generation buy” and get more people on the housing ladder. So, policy in recent years has tended to penalise landlords and favour first-time buyers.
It’s possible, though, that this most recent bit of state intervention might at least nudge mortgage lenders into offering more competitive products and, in general, being less risk-averse. That could help buy-to-let purchasers in the long run.
You might also want to flag the new mortgage guarantee scheme to family members who have yet to purchase property themselves. If so, the key facts are that it takes effect from April 2021 and will be available for new mortgages up to 31 December 2022.
Corporation tax to rise, eventually
The other headline measure announced was a planned increase in corporation tax. If you own property through a limited company, as many of our clients do, this could affect you in years to come – but not immediately.
For 2021/22 and 2022/23, the main rate of corporation tax will stay at 19%. The rise isn’t scheduled to kick in until 1 April 2023 when the main rate will go up to 25% on profits over £250,000.
As an added wrinkle, there’s also going to be a new small profits rate for companies with profits of £50,000 or less. They’ll continue to be charged at 19%.
From £50,000 to £250,000, the rate will taper at 26.5% – so no cliff edge. That’s potentially good news for landlords with smaller portfolios.
On the downside, as some have observed, it’s also a strong incentive for people to hold back on growing their business – a classic case of the tail wagging the dog.
More worryingly, it’s probably just a taste of what might await us in another Budget in the autumn, or in Spring 2022, as Mr Sunak starts working in earnest to pay off the country’s colossal COVID-19 debt.
Increasing tax by doing nothing
Though the Chancellor put a positive spin on it, we accountants spotted immediately that the freezing of certain personal allowances will represent a sneaky tax grab over the next five years – if they come to fruition.
Usually, the thresholds creep up more-or-less in line with inflation to prevent taxpayers being out of pocket. By removing that mechanism until April 2026, the Chancellor ensured that many will now find themselves paying more tax (known as Fiscal Drag).
For example, the lifetime allowance for pension contributions was frozen which means some now face paying a 25% levy on any extra income from their pension pot, rising to 55% if they draw down a lump sum. This will ring alarm bells with clients whose property investments are just part of their plan for paying for a comfortable retirement.
At the same time, after one more small increase in 2021, both the personal allowance and higher-rate thresholds will be frozen until 2026. That will push many people into a higher income bracket for tax purposes by default.
No change to capital gains tax… for now
One notable omission was any news of changes to capital gains tax (CGT).
Last year, as we reported here, the Office for Tax Simplification (OTS) made recommendations for CGT reform with potentially massive implications.
We thought Mr Sunak might pounce on this as a way to increase the Government’s tax take while targeting a fairly small group of taxpayers.
That didn’t happen in his latest speech and – we checked! – wasn’t hidden in the small print of the supporting documents that were published after the main event.
That means the current annual exemption for individuals and personal representatives will stay at £12,300 up to and including the 2025/26 tax year. It will be fixed at £6,150 for trustees of settlements for the same period.
Planning is the key
The most important thing landlords can do at this point is engage with the changes and take control.
With strategic thinking and careful planning, and two years’ notice in the case of some incoming tax increases, we should be able to help you mitigate the worst of what might be around the corner.