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Tax and Landlords - the issue that won’t go away

I recently attended the NRLA’s annual conference in Birmingham and a theme that still dominates discussion in the industry is the tax treatment of landlords. 

Department of Levelling Up Housing and Communities Secretary of State Michael Gove (wisely attending the session via Teams rather than in person) and Clive Betts, Chair of the DLUHC Select Committee, both faced questions over whether the Government should revisit the removal of Section 24 and the phasing out of mortgage interest relief to incentivise landlords to extend the supply of privately rented homes.

Another area of angst amongst landlords is the beneficial tax treatment afforded to short-term holiday lets compared to the long-term rental market. 

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Of course, tax is a decision for HM Treasury but the fact that these questions still arise nearly three years after mortgage interest relief was removed and replaced with the 20 per cent tax credit shows how central this issue remains to the landlord community. 

The successive Bank of England interest rate increases since the start of last year, and the associated rise in mortgage rates, have brought the issue to the fore. 

We recently surveyed over 1,000 landlords for our latest report, The rise of the limited company landlord. It showed that landlords who hold all their properties within a limited company structure, 23 per cent of the respondents, are generally newer and younger operators who have built their portfolios within a limited company from the off. 

Just under a third of landlords, 31 per cent hold a mix of limited company and personal name property, but the largest proportion, 34 per cent, hold all properties within personal name. 

And it is those landlords who are facing the challenge of being taxed on rental income, rather than the profits of their lettings activity. During times of lower interest rates, this was less of an issue than it is today when mortgage rates have increased. 

The challenge landlords face is incorporating those properties. Our research showed that whilst 33 per cent of landlords with property in their own names plan to incorporate within the next three years, 37 per cent believe it is unlikely that they will do so. Tax was cited as the main barrier for incorporation, followed by landlords not knowing enough about this route. 

Limited company landlord ownership has grown significantly in response to George Osborne’s – there were five times as many special purpose vehicles established by limited company landlords last year than there were in 2015 – and it is only going to get bigger. 

Three-quarters of landlords said that the next property they purchase would be within a limited company structure, compared to just 7% who said they would buy it in their personal name as an individual. 

However, at a time of an acute supply and demand imbalance for rental property, it’s important that those who hold their property in their personal name remain committed to the sector. 

Reforming the tax treatment of landlord is not high on this Government’s agenda, so it’s unlikely that we can expect any change in this area soon.

However, it should be a focus for the next Government as part of a range of measures to ensure the private rented sector has the supply necessary to meet the nation’s rental needs.

We believe that the limited company route will be the preferred option for landlords purchasing new property going forward, but landlords with property in personal name need a fairer, more balanced fiscal approach to encourage continued participation in the sector.    

* Richard Rowntree is Managing Director of Mortgages at Paragon Bank *

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    More favourable tax treatment for landlords is pie in the sky.

    However, the discussion is a useful diversionary tactic from the draconian control of the private rental sector which is being implemented through legislation - and which is leading to a housing crisis.

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    How are you Andrew? We have all been thinking about you and wishing you well!

     
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    Ellie, it's just resetting tax treatment for landlords back to the same as every other sector in the UK

     
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    They should, of course, do that, Grumpy Doug.

     
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    Don't hold your breath fellow landlords....

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    Its S21 that is the show stopper for me - n - we live in a community where if you do not know someone you can usually find out a bit about them through various sources ie work or friends etc so I tend to leave a house empty until I come across someone that I know can and will afford it and will not stay forever ie will buy a house or move on for work so I know I will get my house back. We started in BTL as a pension because we did not trust the government and state pension or private pension system 20 years ago and will now choose tenants - in the short term at least - based on much tougher criteria. I offered to show our local MP my Openrent account so he could see the 40 to 50 applicants that got turned down and why!

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    Agreed. Many people went into the PR market to avoid pensions. One of the many reasons for the attack on the PRS is so that landlords give up and put their money into the financial markets. Another sitting duck.

     
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    government cann't be seen to be giving us anything even though it could reduce rents and bring more property to the rental market
    On another subject just thought you would like to know that I'm sat here with a mug of tea in Royal Papworth having a tripple bye pass, aortic valve and loop replaced 8 am last Saturerday morning, I', up and about and home tomorrow all being well, what a fantastic place and people this place is

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    That is marvellous news that you are going home tomorrow! So pleased!

    You sound as though you have had major surgery - so good to hear that you've been treated well.

     
    Daniela Provvedi

    Hi Andrew, thanks for letting us know.
    We've all left messages for you in past Landlord Today Articles.
    I'm pleased to hear from you, and that you are well.
    Great to have you online again :-)

     
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    Wishing you a speedy recovery, Andrew, but don’t rush it.

     
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    welcome back Andrew - hope you are feeling better

     
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    Nice to see you're back. Take it easy and follow your exercise instructions. Don't forget your body has been through a big trauma and will take time to heal. Wishing you all the best.

     
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    • A JR
    • 02 December 2023 19:00 PM

    Great news, sounds like your personal ‘refurb’ has been a great success. Welcome back!

     
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    I've made a fantastic recovery thanks to the care here at Royal Papworth, everything is still very hard work though

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    Bound to take time for you to be feeling yourself. Just concentrate on having treats now - and planning for a wonderful, but relaxing Christmas.

     
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    Great to hear all went well! Look after yourself and be patient. All will come good in time

     
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    Andrew

    Glad you're well on the mend now.

    I'm around 3 years older than you and still in rude health, but then I've never touched that Irish stuff you like, just the superior Scotch single malt version!

    I'm just back from my annual cruise and yet again was cruelly dumped on the pier after my contract came to an end. No option to stay onboard free whilst waiting on the bailiffs but then again the cruise cost hadn't gone up by 33% (unlike some of my rents) and there wasn't a huge number of desperate would be cruisers chasing every available stateroom, an example of market forces being allowed to work properly.

    I would strongly recommend a relaxing cruise as a means of convalescence and there are excellent options from Southampton and other UK ports to avoid any exhausting flights at either end.

    Hope you're fully back in the saddle soon but listen to your body (and your wife) and don't rush your recovery!

     
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    Andrew congratulations you’ll be feeling much better now there’s possibly a tendency to over do it, be aware I have seen it played out 👍

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    Get well soon Andrew. Best wishes.

    Is Robert OK? He's been very quiet recently.

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    Congratulations Andrew

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    Why are Landlords who hold properties in their own name penalised . Is it because we are considered small Mum and Pop landlords . Why are they actively trying to drive us out . Yes there is a short term gain when we are forced to sell up. But the Policy has caused Rent increases for Tenants , and a shortage of rental properties . and an increase in Homelessness.

    This is a policy where neither Tenants or Landlords win

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    Because the man that hit private landlords hard and thus benefited the corporate landlords ended up on £650,000 a year for a one day week working for a major corporate landlord.

     
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    1. Osborne trousering £650k p.a from BlackRock (as CH correctly points out)
    2. John Kingman - bigwig at the Treasury at the time. PIcked up a knighthood and became Group Chairman of L&G - we all know their ambitions in this space
    3. John Godfrey - another L&G stooge who had a stint at the policy unit in Downing Street.
    Whilst all the above have no doubt been rewarded for their abuse of the power of the state to kick the little guy, their cunning plan has gone awry. Corporate Build To Rent numbers are woefully short of target and slowing rapidly.
    "The UK's BtR stock now stands at 92,140 completed homes, with a further 59,043 homes under construction. In addition, there are 112,511 homes in the planning pipeline, including those in the pre-application stage. The total size of the sector is therefore 263,694 homes" - Q3 2023 Savills. So even if this all gets built, we're only looking at 5% of the total PRS !
    Unsurprisingly they are finding it difficult to make the numbers add up, and their sources of funds are finding better returns elsewhere.

     
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    Back to the article.

    I own 14 properties in my personal name and 2 via a limited company.
    I've investigated moving the personally held ones into a limited company but the advice seems to be so variable I haven't done it. Some tax advisors reckon it involves selling the properties to the company and paying all the associated CGT, SDLT and mortgage early repayment penalties. That would probably be somewhere between £750K and £million. Others have promoted schemes involving 3 years of trading as a LLP and then somehow washing out CGT? It all sounded very complicated and like it was skating round the edges.
    I had the added complication of assorted ownerships and no one has been able to confidently say if I would have to incorporate all of the properties I have any ownership of or just ones I solely own or jointly own with my husband. When I looked into it my ex daughter in law was joint owner of 2 of the properties and there was no way she would have anything to do with a limited company. So did that mean I could put the other 12 in a company or that I couldn't do any of the 14? We couldn't get a confident answer to that question so we did nothing.

    We left the already owned properties as they were and started a limited company 4 years ago. Back then the plan was to buy several in the Ltd company but a combination of Covid and Sunak's ridiculous interference overheating the market put a stop to that idea. Now the uncertainty with the RRB is another reason to do nothing.

    Limited companies have pros and cons.
    The trivial benefits and tax free Christmas party allowance are nice. Being able to put rental profits into a SIPP (which is outside our estate for IHT purposes) is very nice. That can either be directly from the company into the SIPP or via a salary or both. The salary route has the advantage of ensuring a full NI history and shows as earned income for other borrowing purposes.
    There's also the ability to get a very tax efficient car via the company and just pay Benefit in Kind tax on it.

    The disadvantages of a limited company are more onerous accounting procedures and additional accountancy fees. Also a far more restricted range of mortgage lenders, some of which insist you use a very restricted number of conveyancers when purchasing. Last year Fleet mortgages insisted I use one of 12 firms in the entire country. Some of those 12 weren't taking on any more work and those that were charged far more than anyone would normally pay.

    It's undoubtedly true that newer, younger landlords are more likely to own via a limited company. Older landlords were advised for many, many years not to have limited companies. Personal ownership was always the best route according to virtually all accountants until Section 24 was invented in 2015.
    Back when a lot of us started out we had taper relief on CGT so BTL was a very good alternative pension strategy, especially for the self-employed. Not being able to pay rental profits into a conventional pension scheme was OK as taper relief compensated for the tax relief on pension contributions we weren't receiving. Removing taper relief and now reducing the CGT allowance to almost nothing is blatant discrimination to the whole landlord community.

    The danger of limited company ownership being the only viable option for new landlords is that is makes it all seem more serious and complicated. It will stop people before they start. It's the kind of industry most people sort of drift into. Maybe they move into their new partners house and decide to rent out the other house just in case the relationship doesn't work out. Maybe they inherit a house and don't want to sell it right now. Some of those people will enjoy being a landlord and will think about buying another property. They might have heard of limited company ownership but the usual advice is it's only really worthwhile if you're going to own several houses. How many people starting out think it is going to be financially possible to buy multiple properties?

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    And of course all those older landlords who were encouraged to borrow in their own names are all now at an age (60+ and lots 70+) where they are just saying "sod it, I've had enough of battling the authorities" and are cashing out. Statistics show that the majority of portfolio landlords (ie the 1 in 5 that Osborne battered with S24) are 65+ and therefore represent a significant proportion of the PRS. Tellingly, although the Treasury was able to identify about 400,000+ landlords (20%) who were affected by S24, they did ZERO RESEARCH as to how many PRS households would be affected. Pareto's Principle (80/20 Rule) tells us that it is a significantly high proportion - I have seen estimates of 65% plus.
    Portugal and Malta are full of ex-UK and Irish landlords who have cashed out and are certainly not coming back! Ireland has largely reversed their version of S24 and is trying desperately to get their PRS resurrected. We have a lot more pain and homelessness to go here, but I strongly believe that it will happen. Let's face it, even Gordon Brown recognised that letting a few million private citizens cough up billions of their own cash to house even more millions of other citizens was a no-brainer. They'll dress it up so it doesn't look like a climb down

     
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    @ grumpy doug - they can climb down, up or sideways, but I will not vote for this faux-conservative mob. They are not a government, they are marking time to the next election. They couldn't even get the VITAL wording to abolish new leaseholds in their own legislation!

     
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    @Annoyed - 100% agree about not voting for these incompetents.

     
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    Did someone say there’s a shortage of housing no need to wonder why with this burden of Administration. This is nothing to do with putting roofs over heads but a huge obstacle coupled with all the other costs of physical Compliance’s , licensing, penalties, S21 removal S24 introduction, penalties, Court cases etc.
    All this because Computers were invented and they all got diarrhea of the mouth and can’t stop. Well done Mr Gove just add TRRB and the homeless picture is clear, its ridiculous for me to see young people sitting on the Streets in the freezing cold in Ealing yesterday the Queen of the Suburbs with only a duvet wrapped around them and selling Big Issue for millionaire proprietors.

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    Andrew, I am glad you are on recovery. Take it easy! Christmas is good time for relaxing and getting to full recovery.
    There is a lot in store coming up with stupid legislation, as if there were not other issues for the LLs as Michael outlined them above.
    For the government, it is just being relevant when they legislate against the LLs. However, for the tenants needing homes is a survival, whether they are social or working tenants.
    For the LLs, in the long term they will disappear. The government will earn in CGT.

    Jo, you are right there are a pros and cons in owning properties in a limited company. I set up mine in 2005, as my accountant at the time suggested it. My occupational income was pretty high at the time and was advantageous to have properties in the company name, separate entity. I kept the properties that we had in our joint name with my husband. Any new properties were purchased in the company name, since 2005. However, I understand selling properties will mean paying 25% tax and getting funds out of the company can mean paying additional 40% tax. There are tax accountants who are talking about as Jo stated above "schemes involving 3 years of trading as a LLP and then somehow washing out CGT". We do not have children. My aim is to leave a large chunk to the charities, including homeless charities who provide homes for people who work but do not earn sufficient amount to pay their rent. This particular charity looks after tenants and properties, by maintaining for small jobs and paying the utility bills. So I have now got a dilemma and will have to come to a decision. I rather give 30 to 40% to charity to avoid paying that tax. LLs with children can pass on shares to their children, I understand. So some people I know have set up a company on this basis to never sell and pass on to their children. There are people who are not bothered about the legislation, may be it has not quite registered with them yet.

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    Vibha, don’t be taken in by those Charities they might be as nice as pie to you on the face of it, with an anterior motive and very applaudable. There are usually Directors creaming off behind the screens.
    Well if you have no Children you’ll have relatives even if you don’t get on, leave be gone’s be by gone and give it to them.
    When they were changing to this Company thing they said if you ran and managed to own lettings you could incorporate without all the extra costs although there can be disadvantages as well.
    Anyway we have been fools to house all those people slave our guts out, income tax to the eyeballs, all regulation’s and licensing hassle, 28% c/gains if we sell, 45% income tax if we keep, another 40 inheritance tax when we die, don’t give anything to Charities that despise us. They have Charity Status working in collusion with government getting millions of Public money then to rub salt
    into the wounds if landlords gives them 4% of their Estate it’ll reduce their tax Bill by 10% as I understand it, some corruption I’d rather flush I down the loo. So Charity begins at home leave it to your Kip & kin the Shrouds has no Pockets.

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    You have raised some very valid points.

     
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    Sorry I meant Charity tax other way around it’s all waste any.

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    To Andrew, sorry to hear your news but very pleased to see that you have been well looked after and are on your way to a speedy recovery. Like many have said here take it slow. Having been through another procedure myself and the first time i'd ever been laid up I made the mistake of running before I could walk and ended up needing a much longer recovery time.
    Therefore take it slow and let your body heal.
    All the best, Andy

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    Robert. Welcome back missed your input and I thought that stuff whether Irish or Scotch was supposed to cut the fat out of your Arteries.
    Also missing Big Jim Daddy gone quite lately, the Section 8 man that thought Section 21 was irrelevant. I suppose he has more than enough on his plate now like the rest of us, no offence.

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    Michael

    Thanks. I'm not sure how whether "the water of life" is helpful or harmful to our health but heredity seems to be a big influence judging from people I know and their family members.

    What's clear is that those at the front end of our NHS do a great job despite the abysmal quality of management and politicians running it - a true case of lions led by donkeys!

    Parallels with the prs spring to mind!

     
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