The taxman cometh. Are you ready?

This year more than ever, it feels like the taxman has landlords in his sights. So now is a great time to get informed about the effect of the latest tax changes on your finances.

Recent tax reforms, coming hard on the heels of hikes in mortgage rates and the cost of living, are squeezing the profits of landlords big and small.

Whether you have just one rental property, or a large portfolio in a limited company, you need to be aware of the Budget changes.

Some landlords may find themselves facing penalties and extra interest payments by accidentally not complying with the new tax rules. Others will get drawn into the higher rate tax band for the first time.

Faced with such a cold economic climate, some buy-to-let landlords are even throwing in the towel and selling up. Yet the demand for rental property is high and growing.

If you would like some help taking the challenge out of property, our team of friendly professionals here at Caxtons can offer expert advice.


Personal Allowance frozen

Top of the list of tax hits this year is the freeze in Personal Allowance. For the third year in a row, the amount you can earn before paying tax is staying at £12,570.

As inflation bites, this will reduce the value of the allowance, and increase the proportion of your income which is taxable.

Plus, the Government has indicated that the allowance will remain frozen until 2028.

Coupled with a freeze in National Insurance thresholds, this will create an extra 3.2 million taxpayers, according to the Office for Budget Responsibility.


Capital Gains Tax allowance cut

Buy-to-let landlords are already taxed three times – at the point of purchase (Stamp Duty), on any rental profits and when they sell, in the form of Capital Gains Tax.

The amount the Treasury takes in CGT – which for landlords means tax on the gain in value of a rental property between the buying price and the selling price – is also set to rise.

From April this year the CGT Annual Exempt Amount is being reduced from £12,300 last financial year, to £6,000 this year. From April 2024, it will be cut down to £3,000.

So from April 2024, landlords who pay income tax at the basic rate will pay an extra £1,674 in CGT when they sell their property, while those on the higher rate of tax will pay an extra £2,604.

With a substantial rise in house prices in Kent of 23.5% over the past 5 years, as reported in the Kent Property Market Report, landlords will have made higher capital gains and be liable to more tax. (And the taxman will be rubbing his hands in glee!)


Risk of penalties for non-compliance

Landlords are required to report and pay CGT within 60 days of the sale of their property.

With the CGT allowance being cut, the number of taxpayers who are liable to CGT will go up.

However, there are warnings about “low awareness” of the allowance cut among some landlords, leaving them at risk of non-compliance.

“A general lack of awareness of the reduction might leave unrepresented taxpayers exposed to penalties and interest arising from inadvertent non-compliance,” according to Tim Henderson of the Low Incomes Tax Reform Group.


Landlords facing an economic crunch

Many of the tax increases are to fill the hole in the Treasury’s coffers caused by the pandemic. But the Government’s cooling attitude towards buy-to-let landlords precedes 2020.

Buy-to-let landlords were already paying an additional 3% in Stamp Duty on top of the standard rate when they buy their properties, a measure introduced in 2016.

This was followed in 2017 by the phasing out of mortgage interest relief which had allowed landlords to offset mortgage payments against tax.

This relief had benefited higher rate taxpayers, who enjoyed 40% tax relief on their mortgage payments. By 2020, the phasing out was complete, and now all landlords receive a tax credit worth 20% of their mortgage payments.

The changes were introduced at a time when the UK had enjoyed a long period of low mortgage rates.

But since December 2021, the Bank of England base rate has gone up 11 times, from a low of 0.1% to 4.25% in April 2023.

This has led to mortgage rates hitting a high of 6% after the mini-Budget last autumn.

So landlords now face both higher mortgage rates and less tax relief – a double whammy.


Potential housing crisis

Faced with a sharp rise in mortgage costs and the increased risk of tenants falling into arrears due to rent increases, some landlords are bowing to the economic crunch, selling up and quitting the market.

Yet the demand for rental property is high and growing. Students, contract workers, digital nomads and many others who cannot, or do not want to, get on the property ladder are having to compete for fewer properties on the rental market.


Dividend Allowance Cut

Increasing numbers of landlords have tried to mitigate some of their tax burden by setting themselves up as limited companies.

In this way, they can offset their mortgage interest payments against rental income before paying tax.

But landlords who pay themselves dividend income from shares need to be aware that the tax-free allowance was cut in April from £2,000 to £1,000 for the current tax year. It will be reduced to just £500 from April 2024.


Corporation Tax rise for those making more than £50,000

Taxes for portfolio landlords who make more than £250,000 a year in profit from letting their properties through a limited company will rise from 19% to 25%.

Smaller portfolio landlords whose companies make up to £50,000 in profit will continue to be taxed at 19%.

But those who make in excess of £50,000 up to £250,000 profit will pay at the main 25% rate reduced by a marginal relief, providing a gradual increase in the effective rate of Corporation Tax.


Higher rate tax threshold frozen

The number of people caught by the higher rate of tax at 40% is set to rise by 2.1 million over the next five years due to the rate being frozen at income of £50,270.

More high earners will also pay the additional rate as the threshold was reduced from £150,000 to £125,140 in the Budget. Earnings above this rate will be taxed at 45%.


Making Tax Digital plan pushed back

Government plans to streamline tax administration by making it online only under the Making Tax Digital scheme have been delayed but are still on the horizon.

Landlords who pay income tax and have property income of more than £50,000 will have to comply with the plan from April 2026.

Those whose property income is more than £30,000 will have to comply from April 2027.
Meanwhile, there is a temporary reprieve for smaller businesses and landlords whose income falls below £30,000. The Government is conducting a review before deciding on whether the digital plans will apply to them.


Expert advice from Caxtons

This year’s tax changes are just the latest twist in what some see as a game of cat and mouse played between the Government and landlords.

If you would like some help taking the challenge out of property, our team of friendly professionals can help.

For expert advice, please get in touch with Debbie Pennell, Head of Residential Management and Lettings on 01634 576000, or drop her an email on [email protected]


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