Individual buy-to-let (BTL) landlords have, according to recent reports, taken pre-emptive action and have restructured existing property portfolios, or purchased properties in limited companies, to negate the effect of the UK Government’s new income tax rules to be implemented in April 2017.
As explained in Edwin Coe’s previous property blogs, currently individual (as opposed to corporate) landlords can offset mortgage interest payments against rental income, meaning higher rate tax payers can claim higher levels of relief. However, the forthcoming changes to income tax rules include that between 2017 and 2020, this will be phased out and replaced with a tax credit capped at a maximum of 20%.
Accordingly, BTL landlords have formed limited companies, increased rents (to compensate for reduced income) or transferred properties to (lower rate tax paying) family members, to lessen the impact of the proposed changes to income tax to be implemented in April 2017. Reports have suggested that this year, there has been an increased number of BTL loans advanced to limited companies for the purposes of purchasing properties, with such a trend set to carry on as the new tax rules take effect.
The tax changes were introduced by the previous Chancellor of the Exchequer in the 2015 Budget, with a view to balance the perceived differences between owner-occupiers and investors in the residential market and to reduce tax relief for individual investors, who were perceived by the Government, to have an advantage over home owners.
On 6 October 2016 a judge in the Royal Courts of Justice denied a bid by individual BTL landlords for a judicial review into the new law, which removes their ability to deduct mortgage interest costs from their rental income before calculating their tax bill. The claimants contended that the tax system had historically favoured people who bought homes to make a profit over people who just wanted somewhere to live. The BTL landlords were concerned that the new law penalised individuals who had invested their money into property at a time of low interest rates.
Cherie Booth QC, wife of Tony Blair, represented the BTL landlords who argued that the new legislation was unfair and discriminatory because it favoured landlords in limited companies over their privately-owning (individual) counterparts and further, the new tax would not increase the number of people who could afford to own their own homes. The BTL landlords also argued tax treatment of individuals and corporations taking part in the same activity should be comparable. However, the court held that the law was not discriminatory and did not unfairly favour corporations above individuals. In this case, the Government argued that Parliament had the right to change tax law how it wished and that it was normal for individuals and companies to be taxed differently.
The proposed tax changes have amplified the problems in the currently unregulated UK private rented sector as landlords seek to increase rents, when rents are at unprecedented highs, and strong house price growth has also increased the demand and thus, value of rented accommodation.
As reported by Edwin Coe this summer, BTL landlords have also been subject to the Stamp Duty Land Tax (SDLT) surcharge. Therefore, the new income tax rules have caused individual BTL landlords to the above take pre-emptive measures to ensure their investments remain profitable. BTL landlords should consider the SDLT consequences of any transfers of property to another individual entity/company.
The action taken by BTL landlords indicates that there is confidence in the UK BTL market; however it would be prudent for BTL landlords to seek legal advice in respect of their property portfolios.