Stamp duty land tax changes- what does it mean for the future of residential landlords?

Anne Wilson, senior tax manager of the tax department at Pierce Chartered Accountants looks at some of the future changes that residential landlords will face.

It came as no surprise that there was a record number of Stamp Duty Land Tax (SDLT) receipts earlier this year as buy- to-let landlords rushed to beat the deadline for increases in SDLT introduced on 1 April 2016.

However, increased SDLT costs on the purchase of additional residential properties is not the only nasty surprise in store for residential property investors.

Stress tests

In March, the Bank of England announced its proposals for much tougher buy-to-let mortgage lending criteria. The rules will require lenders to carry out stricter “stress tests” on prospective borrowers or those wishing to re-mortgage to ensure that they have sufficient capital to cover repayments if interest rates increase to 5.5 per cent.

Tax relief for finance costs

In the future, there will also be changes to the way that tax relief for interest payments on the purchase of residential lettings will be given in the tax computation. This will affect individuals, partnerships and limited liability partnerships which let out residential properties. At present there are no proposals for this restriction to apply to furnished holiday lettings nor to companies with residential lettings.

Currently, rental profits are reduced by any loan interest paid and therefore a top rate taxpayer could receive tax relief at 45 per cent on their finance costs. Under new legislation the loan finance costs will be relieved by way of a reduction of the tax liability, rather than a reduction in the rental profits, and is restricted to relief at the basic rate of income tax. Those with substantial rents and interest costs, thus with low net profits, who are currently basic rate taxpayers, could see their income pushed into the higher rate band as the interest costs will be added back to the rental income. For example, an individual whose only income is rents of £50,000 and interest costs of £20,000 would have net income of £30,000, and so within the basic rate tax band. Under the new rules the same individual would be a higher rate taxpayer because their income would be £50,000 with a deduction for interest relief given at the basic rate only.

As a result of the way in which the net rent will be calculated those whose income is close to the £50,000 threshold for the withdrawal of child benefit, and those with income near £100,000 for the withdrawal of personal allowance could be adversely affected even though their income has not actually increased.

To “soften the blow” these measures will be phased in gradually over four years and will apply to 25 per cent of the interest costs in the 2017-18 tax year, 50 per cent in the 2018-19 tax year and 75 per cent in the 2019-20 tax year before being implemented in full in the year to April 2021.

If you have a relatively modest portfolio of properties which are let out as residential lettings, it maybe that you will simply have to accept that your income tax liability in respect of those lettings may increase in future as taking any steps to mitigate the interest restriction could be costly. Sharing income with family members or family trusts may be worth considering but capital gains tax issues will need to be addressed.

Incorporating your business

If you have a substantial portfolio of residential lets you may wish to consider incorporating your business, however, there could be a substantial capital gains tax liability if you incorporate your property portfolio because moving the properties into a company could trigger capital gains tax. However, if you have a large property portfolio that you devote a substantial amount of time to managing, it may be possible to claim capital gains tax roll-over relief on incorporation of a business to mitigate the capital gains tax liability arising. If you have no gains in your property portfolio it may be possible to transfer the properties into a company without triggering capital gains tax.

However, there is likely to be a substantial SDLT liability on the property transfers to a company, unless specific reliefs are available, and incorporation of a property business should not be undertaken without specialist advice. It would be necessary to weigh the costs of incorporating an existing property business, including administering a company, against the additional cost of the new interest rules. Also the new “stress test” rules could see the cost of your borrowings increase. The residential property investor is entering a whole new world and it remains to be seen if George Osborne’s efforts to help first time buyers onto the property ladder, which is a laudable aim in itself, are helped or hindered by the various measures he has introduced.

Enjoyed this? Read more from Pierce CA Ltd

Latest news

1

Chiptech announces major innovation initiative at high-profile reception with the New Zealand Prime Minister in London. The Rt Hon Jonathan Reynolds, the Rt Hon Christopher Luxon and the Rt Hon Steve Reed (L-R Front Row) David Hammond, and Daniel Knowles

Chiptech announces major innovation initiative at high-profile reception with the New Zealand Prime Minister in London.

30 Apr 2025

2

Northstone secures full planning permission for 50 new homes in Edenfield Edenfield housing development

Northstone secures full planning permission for 50 new homes in Edenfield

29 Apr 2025

3

Ring Stones Maintenance and Construction celebrates completion of Dovestone Gardens Dovestone Gardens launch

Ring Stones Maintenance and Construction celebrates completion of Dovestone Gardens

29 Apr 2025

4

PHX Training welcomes new business leader to drive learner success Louise Kirby

PHX Training welcomes new business leader to drive learner success

29 Apr 2025

5

Lidl to invest half a billion pounds in its expansion as it eyes sites in Lancashire Lidl

Lidl to invest half a billion pounds in its expansion as it eyes sites in Lancashire

29 Apr 2025

Pc Prestonmacan Gif980x120 March
Background image for hub sign up block

LBV Hub

Leverage Lancashire Business View platforms

Post your news
Post your events
Post your offers
Build your network
Improve your SEO
Gain coverage in the magazine
Sign-up
Events
LBV122 May/June Launch Event
121 Lancashire Business View Magazine Launch
Networking
21 May 2025

LBV122 May/June Launch Event

Lancaster and Morecambe College, Lancaster, LA1 2TY

08:30 - 10:30

Sub36 Networking
Networking
11 Jun 2025

Sub36 Networking

British Jewellery School, Scorton, PR3 1BA

15:00 - 17:00

Lancashire Net Zero Carbon Conference
Net Zero Carbon Social 1200px 2
Networking
18 Jun 2025

Lancashire Net Zero Carbon Conference

Crow Wood Hotel & Spa Resort, Burnley, BB12 0RT

08:30 - 13:00

Lancashire Built Environment Conference 2025
BEC 315 X 315 Px
Networking
25 Sep 2025

Lancashire Built Environment Conference 2025

Blackpool Football Club, Blackpool, FY1 6HX

08:30 - 13:00

CMI Level 5 Management and Leadership Course
UCLanAerialCampus.jpg.jpg
LBV Hub Seminars
21 Feb 2025 - 21 Feb 2026

CMI Level 5 Management and Leadership Course

Preston Campus, Preston , PR1 2HE

09:00 - 17:00

CMI Level 5 Project Management Course
UCLanAerialCampus.jpg.jpg
LBV Hub Seminars
21 Feb 2025 - 21 Feb 2026

CMI Level 5 Project Management Course

Preston Campus, Preston, PR1 2HE

08:00 - 17:00

RISE - The Academy for Female Leaders and Managers
WENDY BOWERS RISE Illustrstion copy.jpg.jpg
LBV Hub Seminars
02 Apr 2025 - 08 Oct 2025

RISE - The Academy for Female Leaders and Managers

East Lancashire Chamber of Commerce, Clayton le Moors, BB5 5JR

09:00 - 15:30

Planning for the future + navigating Inheritance Tax changes
Planning for the future + navigating Inheritance Tax changes for website.png.png
LBV Hub Seminars
01 May 2025 - 01 May 2025

Planning for the future + navigating Inheritance Tax changes

Stanley House Hotel, Mellor, Blackburn, BB2 7NP, Blackburn, BB2 7NP

08:00 - 10:30

Advantage: AI – A Workshop for Business Leaders – May 2
EV-land-2025-05B.png.png
LBV Hub Seminars
02 May 2025 - 02 May 2025

Advantage: AI – A Workshop for Business Leaders – May 2

Door4 Office, Burnley Wharf, Manchester Road, Burnley, BB11 1JG

09:00 - 11:00

A night at the races
1.png.png
LBV Hub Dinners / Balls
02 May 2025 - 02 May 2025

A night at the races

Morecambe FC, Morecambe, LA4 4TB

19:00 - 23:59

Research and Knowledge Exchange Showcase
13421_research_knowledge_exchange_2025_600x300.jpg.jpg
LBV Hub Awards
07 May 2025 - 08 May 2025

Research and Knowledge Exchange Showcase

University of Central Lancashire , Preston, PR1 2HE

09:00 - 17:00

Innovating business solutions through PhD Partnerships
30478 Skills Bootcamp open day setting.jpg.jpg
LBV Hub Networking
07 May 2025 - 07 May 2025

Innovating business solutions through PhD Partnerships

University of Central Lancashire, Preston , PR1 2HE

14:30 - 15:30

Advertise with us

Reaching 50,000 members, our print, digital and event platforms offer a fantastic way to raise your business profile and help you grow.

Find out more Lbv121 Online Graphic
Subscribe now

Weekly news bulletin