Immovable? Tax it!

The Autumn Statement 2015 introduced yet another extra tax cost to residential property investors, in the form of an additional three per cent stamp duty land tax (SDLT) levy on purchases from April 2016.

The buy-to-let market has flourished in recent years with many investors, both in the UK and overseas, viewing UK property as an attractive asset class and a more reliable form of building wealth, and in some cases as an alternative to a traditional pension. It has arguably been the case that the UK tax system has been generous in its taxation of residential property investors, particularly those investing from outside of the UK.

The immovable nature of property makes it an easy target for tax increases. Whether justified as an attempt to stop tax avoidance or as a way to reduce the tax benefits of residential property investment, thereby giving potential homeowners a better chance of getting their foot on the property ladder,
it seems that HM Treasury has its sights set firmly on this sector.

In the last three years, the UK tax system has seen the following changes announced, all of which exclusively target residential property investors:

• A rate of 15 per cent SDLT on purchase, an annual tax charge and a higher rate of capital gains tax on sale for companies owning residential property for non-commercial purposes from 2013.

• Capital gains tax charges on the sale of residential property for non-residents. Previously non-residents could sell property in the UK with no tax charge. This will no longer apply to disposals after April 2015.

• The restriction of tax relief for loan interest expenses for individuals, starting from April 2017. Currently, an investor whose rental income is the same as his interest expense pays no tax - after all, he makes no profit. From April 2017, the proposed changes mean that an income tax liability will arise even where no 'cash' profit is made, as a result of the restriction on interest tax relief.

• It is proposed that the scope of inheritance tax will be extended from April 2017 to include all UK residential property, however owned.

So what next?

For some landlords, their property is their business and not an investment in the true sense. For these people, the changes and restrictions appear harsh, particularly when ordinary trading businesses or commercial property investors will not be affected.

The residential property investor is left with limited choices; they can and are likely to pass some of the costs on to the tenants by increasing rents or possibly reducing costs by delaying repairs. Clearly, this will not help people who are still unable to get on the property ladder.

It is possible to run a buy-to-let business through a company where tax rates are much cheaper. This could be a viable option for those investors who do not need the income, but there may be significant tax costs in transferring an existing property portfolio into company ownership. However, for those that can and do, while the rental yield will improve, there will be an additional tax cost if they need to extract profits from the company which can remove any saving.

What is possible is that we could see investors disposing of residential property and changing their investment strategy. This could see an influx of properties back on the market before the changes come in. Alternatively, cash rich landlords who may not be affected by interest rates could start to snap up property before the new SDLT changes. Either way, it is hard to see how this will stabilise the property market.

And finally, the chancellor is poised to launch a consultation on the banking regulations surrounding lending on buy-to-let property. Until this point, these loans have not been affected by the rules covering homeowner mortgages, but it would appear this is set to change and could prove to be the final straw for landlords. With lending restricted, rental yields and capital growth diminished, could we see the end of the buy-to-let
as an asset class?

Rebecca Durrant and Tom Elliot are partners at Crowe Clark Whitehill