Landlords are bracing themselves for being targeted by Chancellor Rachel Reeves in the Budget next week after the Prime Minister made comments that suggested the group are not ‘working’ people.
Sir Keir Starmer said that someone who gets their income from assets such as shares or property ‘wouldn’t come within my definition’ of a working person.
The Government has promised not to increase taxes for working people, so the comment has sparked fresh fears landlords could be among those who will face an onslaught of tax hikes in the ‘painful’ budget on Wednesday.
For many landlords this could be the last straw after battling tightened legislation and increasing mortgage rates which have already pushed swathes to sell up in droves.
Plus, Labour’s Renters’ Rights Bill, set to come into law next summer, has already spooked some landlords about the future of the rental market.
Chancellor Rachel Reeves is likely to target buy-to-let landlords in next week’s Budget
It is designed to increase rights for tenants, for example by banning no-fault evictions and discrimination against tenants with children or who are receiving government benefits.
But growing numbers of landlords fear that the additional cost and red tape will make buy-to-let untenable.
For example, landlords will be required to give tenants four months’ notice instead of two when they want to sell or move into their own property. They will also be forbidden from refusing ‘reasonable’ demands from tenants to have a pet in their property.
Here, Mail+ looks at what could be in store for landlords on October 30 – and how you can still get a good return on your investment.
HOW COULD THE CHANCELLOR TARGET YOUR PROPERTY INVESTMENT?
1. Changes to Capital Gains tax
It’s widely thought that capital gains tax (CGT) could be hiked on Wednesday – and it would be the easiest way Ms Reeves could squeeze more taxes out of people who own assets.
CGT is payable on the profit after someone sells or disposes of an asset, such as second homes or shares, that has increased in value.
Individuals who sell a buy-to-let or second home must pay CGT at the point of sale while tax from the sale of other assets such as shares are due for payment in January following the end of a tax year.
Many landlords fear that the additional cost and red tape surrounding buy-to-let properties will make their businesses unprofitable
For sales of shares, unit trusts and personal possessions, basic rate taxpayers typically pay 10 per cent (sometimes more) on their gains.
Higher-rate and additional-rate taxpayers pay 20 per cent. For property sales, CGT rates are higher at 18 per cent and 24 per cent respectively.
However, it is thought the Chancellor has ruled out increases to CGT on the sale of second homes and buy-to-let properties – at least for now – but CGT on stocks and shares could still be in the firing line.
2. Stamp Duty threshold holiday ends
It’s almost certain that stamp duty thresholds will be on the chopping block next year – unless a U-turn is announced in the Budget.
The levy is paid by the buyers of residential properties. Buyers have been enjoying a temporary stamp duty holiday since 2022 after then-Chancellor Rishi Sunak raised the thresholds at which properties start to be liable for the duty.
The threshold was increased from £125,000 to £250,000. Over this, the stamp duty rates begin at 5 per cent and increase to 12 per cent, depending on the value of the property.
For first-time buyers the threshold above which stamp duty is payable was increased from £300,000 to £425,000.
But these thresholds are set to fall back to their original levels by April 2025 as it’s looking increasingly unlikely the Treasury will extend the holiday on these nil-rate bands in the Budget as it is determined to raise an additional £35billion in taxes.
This will mean landlords and buyers of residential property from April will need to pay more stamp duty.
Plus, those buying additional properties typically need to pay an extra 3 per cent on top of existing stamp duty rates if the additional property is worth £40,000 or more.
But Ms Reeves could choose to go further and chop the thresholds to a lower level so the level at which buyers need to start paying stamp duty is even lower. More properties would then get caught out by the tax.
She could also increase the stamp duty surcharge for second homeowners and landlords above the current rate of 3 per cent.
3. Remove CGT forgiveness at death
Capital gains up to the point of death are forgiven, so the families of asset holders who have died are not liable to pay CGT on increases to the value of an asset owned by the deceased.
But this could change at the Budget. Ms Reeves is widely thought to target inheritance tax next week and this could well extend to CGT uplift – or forgiveness – on death.
This could mean if an investor leaves a buy-let-let property in their will, it could be liable for CGT.
A move such as this is almost certainly set to anger grieving families who would possibly need to pay a CGT on top of a hefty inheritance tax bill.
Influential think-tank the Institute for Fiscal Studies (IFS) has argued that the current set up is flawed and has recommended reform.
‘If an asset has accrued gains, it is appropriate to tax these just as much as if the asset were sold the day before death, when it would currently be taxed,’ it says.
HOW YOU CAN STILL MAKE A GOOD RETURN – EVEN IF LABOUR WAGES WAR ON LANDLORDS
1. Choose the location wisely
Although high interest rates have squeezed landlords’ yields, there’s still hotspots across the UK where you can get a good return.
The top spot went to Sunderland in Zoopla data released in April, with an average gross rental yield of 8.96 per cent.
Next up is Aberdeen with an average 8.03 per cent yield, Burnley with 8 per cent and Dundee with 7.96 per cent. Locations in Scotland and the north of England dominate the top ten spots on the list.
Wrexham has the busiest rental market with an average of 54 enquiries per available property
You could also look for busy rental markets. Wrexham is the busiest with an average of 54 enquiries per available rental property, according to property portal Rightmove. The city has an average advertised rent per calendar month of £967.
Other busy markets include Glasgow, with average of 52 enquiries per property and Bristol with 51.
Top spots for improvements in yields include Merthyr Tydfil in Wales with an increase of 1.4 percentage points and Brent in London with yields hiking by 1.3 percentage points, according to Lomond, a letting and estate agents.
2. Pounce on good mortgage rates
Landlords have been punished by sky high interest rates over the past few years as borrowing costs have skyrocketed.
The good news is that rates have started to fall following the Bank of England’s August base rate cut by 0.25 percentage points to 5 per cent. Plus, markets have priced in up to two further cut this year.
This means there’s a return of better rates to the buy-to-let market.
The average two year buy-to-let residential mortgage rate is 5.24 per cent today, while a five-year fix is an average of 5.29 per cent, according to rates scrutineer MoneyfactsCompare.
But there are rates as low as 3.99 per cent with HSBC for those with a 40 per cent deposit willing to pay a £1,999 fee, according to brokers L&C Mortgages.
Set up an alert using tools such as My Mortgage Alert so you can be sure you’re always aware of the best deals.
Use a broker to find the best product available. They can keep an eye out for better rates and products instead of you having to do the heavy lifting.
3. Keep an eye on costs
If you’re refurbishing one of your rental properties, keep an eye on costs to ensure it doesn’t reduce your yield unnecessarily.
Perhaps you don’t need to splash out on a whole new kitchen but instead just replace the tired old cupboards or a rundown worktop.
But don’t cut corners on things that could cause a bigger bill down the line if they’re not done correctly in the first place. Furthermore, keeping good tenants happy can really pay off in the long term.
4. Buy property through a limited company
If you buy your rental properties through a limited company, it can offer tax benefits.
Record numbers of landlords have raced to open limited companies this year to make the most of the tax advantages.
Between January and September this year, 46,449 buy-to-let companies were set up, a rise of 23 per cent on the same period last year, according to analysis of Companies House data by the property firm Hamptons.
Private landlords are taxed on their rental profit as income tax, along with other earnings. But landlords who buy a company through a limited company are liable to corporation tax instead. Corporation tax is levied at a rate of 25 per cent.
This may not make a huge difference for a basic rate taxpayer – but higher and additional rate taxpayers, who are taxed at up to 40 and 45 per cent respectively, can see huge savings.
Limited companies allow landlords to offset interest on mortgages against rental income. This lowers the tax bill.
Buying through limited companies is a complex area and taking advice can be prudent.
5. Check for little known reliefs
While some tax breaks for landlords have disappeared, there’s still a myriad little-known reliefs you can make use of.
For example, when you’re filing a tax return you can deduct expenses from your rental income. Allowable expenses include property maintenance and repairs insurance, grounds rents or services charges or letting agent fees.
You can also claim property allowance, which is up to £1,000 tax-free property income each tax year.
This could help shave even a small chunk off your tax bill.
However, if you claim for property allowance you cannot claim for a deduction for your expenses. Make sure you fully understand the rules to keep on the right side of them.
6. Don’t forget the Rent a Room Scheme
This is another little-known scheme which could cut your tax bill significantly.
The scheme allows landlords to rent out a furnished room in their home and earn up to £7,500 in tax-free income a year, or £3,750 each if you are jointly letting with another person.
Plus, there’s no limit to how many rooms landlords can let out and still claim the relief.
If the amount you made is less than £7,500 over the year you’re automatically exempt from paying tax on that income.
However, if you earned more than £7,500 you can either pay tax on your profit or tax on your gross receipts over the £7,500 limit.