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Summer Budget Tax Bombshell
The Chancellor announced tax changes in his emergency summer budget which will have a huge financial impact on many landlords and according to a recent Scottish Association of Landlords (SAL) survey, could mean that up to a third of rental businesses are no longer viable in their current form. The changes announced are as follows: –
- End of the 10% wear & tear allowance
Landlords of fully furnished properties have been able to deduct 10% of their rental income from their taxable profit to account for wear and tear. The Chancellor is proposing to abolish this allowance and instead allow all landlords (including those of unfurnished and part furnished properties) to deduct the actual capital cost of replacing furniture, furnishings, appliances and kitchenware. Some might consider this to be a fairer and more logical system and the good news is that it will benefit landlords of unfurnished and part furnished properties who are currently unable to deduct the cost of replacing items such as white goods and carpets. However, it is likely to lead to a higher tax bill for many landlords of fully furnished properties.
HMRC has recently run a consultation asking for views on the proposed change which can be found via this link. SAL submitted a response on behalf of landlord and letting agent members.
- Cuts to tax relief on mortgage interest
Until now higher and additional rate tax payers have been able to claim mortgage interest relief at 40% and 45% respectively. A cap of 20% will be introduced in a phased manner between 2017 and 2020. Under the new system tax will be paid on income before the deduction of any mortgage interest and this will push many basic rate taxpayers into the higher rate bands. For more about what is being introduced and how it might affect you, see this link to read a paper on the subject produced by the web portal Property118.
A survey of landlord members carried out in August has revealed that the cuts to tax relief on mortgage interest will have a very significant impact on landlords, with 31% saying their business will no longer be viable as a result of the changes. Based on responses received, we believe that approximately a third of Scottish landlords will be affected by the changes. Of those who responded, 40% of landlords affected by the changes said they would sell their properties and 64% said they would increase rents to recoup the additional cost to their business. The average rent increase planned is 12%.
The Scottish Government’s strategic aim of encouraging growth and investment in the private rented sector is likely to be severely affected by the changes with 61% of survey respondents stating that they had been considering investing in more rental properties in Scotland before the changes were announced. Nearly two thirds of those state they are now less likely to invest.
SAL believe the changes will cause rents to rise and leave tenants facing homelessness as landlords are forced to leave the sector. We are working closely with the Residential Landlords Association (RLA) which represents landlords in England and Wales and met with HM Treasury in September, asking that the Chancellor reconsider the amendments.
In a joint press release with the RLA in September SAL chief executive, John Blackwood, said:
“The Government has failed to do its homework. It is clear that these changes will affect many more landlords than suggested, and more importantly, many more properties and therefore tenants. By taxing gross profit many small landlords will be pulled into a higher tax bracket and others will be forced to pay tax when they have made a trading loss.”
“We are disappointed that the UK Government seems to have failed to understand the damaging affect this could have on the PRS across the UK. Recent surveys confirm that over half of landlords are considering raising rents as a result of this policy, while others are considering selling properties, leaving tenants homeless. The supply of private rented housing will shrink, forcing rents up further and leave already-struggling local authorities unable to cope with housing demand.”
“In Scotland, the report recently published by the Commission on Housing and Welfare makes several very helpful suggestions that landlords, letting agents and investors can help tackle the strategic housing crisis and was broadly welcomed by all sides and political parties in Scotland. The report proposed measures such as involving private landlords in new-build programmes and attracting institutional investors to provide funds for new houses for the private rented sector, rather than just for house-buyers. The move by the Chancellor can only decrease the extent to which the PRS can and will invest in these ways in Scotland and we would urge the UK Government to change its position.”
A petition set up to oppose the tax changes has already received over 25,000 signatures. If you haven’t already done so, please sign the petition here. If you are not yet a member, please join the Scottish Association of Landlords to add your voice to our campaigns.