Update for Landlords on New Government Announcements and Changes
On 17th November, Rishi Sunak delivered the new budget via the delayed Autumn Statement. There was a lot of information to take in, from extensions to the Energy Price Guarantee to tax band freezes and reforms to Capital Gains Tax.
Although the overall impact is a reduction of £30 billion in public spending, the intention is to bring inflation back down to reasonable levels – and mitigate the current high-interest rates and living costs affecting the broader economy.
Tod Anstee has summarised the main points affecting landlords and the property market to highlight those aspects that may be relevant to your rental portfolio.
Reduced Stamp Duty Confirmed Until 2025
There had been a question mark over the Stamp Duty changes introduced in the ‘mini budget’ back in September. Buyers are exempt from paying Stamp Duty on property purchases up to £250,000, although the additional 3% second property surcharge has not been changed.
We now know that this higher threshold will remain in situ until 2025, potentially making the next two years a better time to buy before rates revert to the previous threshold of £125,000.
While some property experts might have hoped this would be left as an indefinite higher duty limit, that was always unlikely. Having certainty about when Stamp Duty rates will increase is useful for planning purposes. The Treasury says that the time limit on Stamp Duty rates will benefit the housing market by stimulating property investment and sales volumes up to March 2025.
Although the Office for Budget Responsibility (OBR) has indicated that activity could slow over the next year or two, confirmation of the reduced Stamp Duty charge may incentivise buyers to move forward.
Capital Gains Tax Allowances Cut From 2023
Currently, Capital Gains Tax is payable on profits from the sale of assets from £12,300 and upward. The allowances will change as follows:
- Reduced to £6,000 from April 2023
- Drop further to £3,000 from April 2024
In short, any taxable capital profits will be subject to a higher tax rate. However, the amount of gain liable for tax is calculated after deductions, including valuation costs, improvement expenses, and Stamp Duty and VAT – where applicable.
This announcement may make it more viable for some landlords to trade as a limited company because incorporated businesses can claim tax reliefs to reduce or delay Capital Gains Tax exposure.
It could also mean that some landlords sell properties they expect to remove from their portfolios before the higher Capital Gains Tax is payable. Sellers may achieve a good value as buyers will be equally keen to purchase while the higher Stamp Duty exemption is in place.
Speculation about a potential doubling of the Capital Gains Tax rate was unfounded. Instead, the tax will remain at 28% on residential properties, which the government hopes will ensure landlords retain private rental accommodation to help balance the demand for quality rental properties. Demand is outstripping supply and causing rental prices to rise steadily, irrespective of interest rates and other running costs.
Energy Price Guarantee Extension
The Energy Price Guarantee ensures that the average household will spend no more than a cap of £2,500 on utilities. This scheme will remain in place from April 2023, which will be welcome news for millions of households concerned the initiative may have ended next March.
There is a caveat: from April, the cap will increase to £3,100, although this will still go some way to mitigating the costs of electricity and gas supplies, with the potential for worldwide markets to stabilise in the interim.
Governmental support will continue to be given to lower-income households, and rental tenants may be eligible for several other payments and subsidies to help with living costs, such as:
- Cost of Living Payments up to £900
- Winter Fuel Payments up to £600
- Cold Weather Payments of £25 per day
- Warm Home Discount Scheme of up to £150
The Energy Bills Support Scheme also made its first payments in October, with a £66 discount for 97% of eligible households as part of a £400 discount over six months on energy bills.
Tenants struggling with heating bills may also be eligible for further support, primarily aimed at those receiving certain benefits or tax credits.
Changes to Income Tax Bands
A less welcome announcement relates to Income Tax and Dividend Allowances, which have been reduced or frozen – although tax rates have not increased.
The Treasury expects to increase tax revenues by freezing bands, meaning more people will tip over into a higher Income Tax bracket. As a summary:
- The Income Tax threshold of £12,570 will be frozen until April 2028 (a two-year extension).
- National Insurance and Inheritance Tax thresholds have been frozen for the same period.
- Dividend Allowances drop from £2,000 to £1,000 from April 2023 and to £500 from April 2024.
- The higher rate 45% tax band will apply to earnings from £125,140 rather than the previous threshold of £150,000.
Analysts predict that the changes to the additional rate will mean that around 250,000 taxpayers pay an extra £580 per year.
Potential Adjustments to Come in 2023
The Autumn Statement included multiple reforms, with many announcements labelled ‘stealth taxes’ since the government will increase tax revenues by freezing allowances and tax bands without outwardly raising tax rates.
However, there are no other fiscal events scheduled for 2022, which brings some reassurance that the recent contradictory U-turns will not be repeated.
In the year ahead, the government is expected to publish further details about the much-anticipated rental reforms and possibly provide guidance about its plans to increase EPC rating requirements for rental properties.
Over the long term, the benefit of the recent budget, albeit unwelcome in some respects, is that the financial markets have not reacted significantly. Many experts expect interest rates to plateau in the months ahead and eventually return to a minimal 0.1% base rate.
While the next 18 months may require careful tax planning, attention to claiming eligible tax exemptions and strategising to maximise profitability, the expectation is that the rental market will emerge with greater stability and strength – with most rental assets long-term, profitable investments with an ongoing positive income yield.
For more guidance about how the government announcements affect you, your property portfolio, or future plans, please contact Tod Anstee at your convenience.