Landlords are already heavily taxed and this tax could result in the nation’s tenants paying the price, writes Sarah Coles, head of personal finance, Hargreaves Lansdown.
The British love affair with property could be tested to destruction. The latest Budget rumour is that National Insurance could be payable on the profits from rental income. Property is already one of the least tax-efficient ways to invest, and by adding to the mountain of tax paid by landlords, it may persuade even more of them to sell up.
Tax mountain
Landlords already face an array of taxes. They pay extra tax when they buy the property, because there’s a surcharge on top of stamp duty. This was hiked last October from 3% to 5%. And that’s just the start of it. When an investor rents out the property, they also pay income tax on profits from rental income. They can subtract their costs and there’s 20% relief on mortgage interest, but landlords who pay higher or additional rate tax haven’t been able to claim full tax relief on their mortgage interest since 2017. Meanwhile, because the income tax thresholds have been frozen since 2021, it means more landlords paying higher rates and facing bigger bills.
The tax pain continues when they come to sell, because there’s capital gains tax to worry about on investment properties. The annual allowance has dropped to just £3,000, and the rate is 18% for basic rate taxpayers and 24% for higher-rate taxpayers – and if the gain pushes you over a threshold you’ll pay some of this tax at a higher rate.
And there’s no way to mitigate this. Compare this to investing in stocks and shares. The first £20,000 a year can be held in a stocks and shares ISA, protecting you from capital gains tax and dividend tax. You can sell up and buy at any time without creating a tax bill and take income completely free of tax. It’s a totally different world to the tax-crunch of property investment. You can also hold stocks and shares within a SIPP, giving you tax relief on the way in, and tax-free growth along the way.
If you hold stocks and shares outside an ISA or SIPP, you can realise gains along the way, so you can take advantage of your annual capital gains tax allowance of £3,000 a year. You can also use share exchange (or Bed and ISA), or Bed and SIPP, to move more of your assets into a tax-efficient environment every year.
Extra property costs
It’s not just the tax eating into gains. There’s the cost of buying and selling property. Then there are maintenance and repairs to factor in, as well as periods when you can’t rent the property out. There’s also the hassle factor of dealing with tenants, and if you choose to cut that by using a management agency, you need to account for their fees too.
Property also flies in the face of the importance of diversification. In many cases this is a leveraged investment, and often people will only have one or two properties. It means their risk is massively focused on the value of those properties – not to mention it’s the same asset class as their other main asset – their own home. And property performance varies dramatically, not just from area to area, but from street to street, and according to the individual property. People might think they understand property because they live in one, but investing in property is a completely different beast.
Tenants
Landlords have proven a rich source of tax over the years, but the government will also have an eye on the fact that landlords are already selling up. Figures out at the end of last year showed almost a third of landlords planned to cut the size of their portfolio in the next two years, and around a sixth planned to sell all their properties.
It’s not just the higher tax burden, landlords are also facing the risk of higher mortgage rates when they renew their deals. Then there’s the extra cost of rules protecting tenant rights. For many of them, the maths doesn’t stack up, and while property prices are riding high, they have decided to cash out.
The risk here is that tenants will pay a price. Figures from RICS showed that the number of rental properties coming to the market fell for the 11th month in a row in July. This has added to pressure on rents, which are currently up 5.9% in a year, but have been rising at more than 5% a year for the past three years, so renters have seen multiple hikes pile up. The HL Savings & Resilience Barometer shows that renters have lower financial resilience across the board, so can ill-afford these rises. If more tax on landlords was to persuade more of them to sell up, it could mean even more rental hikes to come.
First time buyers
On the flip side, more landlords selling their rental properties could mean more properties available for first time buyers, and a shift in the supply could help keep a lid on house prices at this end of the market. The government has committed to making property more affordable for those looking for their first home, so there’s the chance that encouraging more landlords to sell could help with this particular policy aim.