What the Recent Chancellor’s Announcements Mean for Landlords

28.09.2022

Last week’s ‘mini budget’ delivered by the new chancellor, Kwasi Kwarteng, has dominated the headlines.

While economists debate the potential outcomes from a raft of sweeping tax reforms, ultimately aimed at easing the cost of living crisis, some of the detail has been lost amid the noise.

Here we unpick some of the specific tax changes, including the new Stamp Duty thresholds, to identify the likely impacts on landlords and the property rental market.

How Stamp Duty Changes Affect Landlords

Effective immediately, the government has introduced new Stamp Duty thresholds, similar to those tapered reliefs available temporarily during the pandemic, to inject momentum back into the property market.

The difference with this latest Stamp Duty cut is that it is permanent:

• The basic threshold at which Stamp Duty becomes payable has risen from £125,000 to £250,000.
• First-time buyers now only pay Stamp Duty on property purchases of over £425,000, increased from £300,000.

Landlords, and indeed any buyer purchasing a second property, must still pay the additional 3% Stamp Duty surcharge. One of the unknown factors is that, while duty cuts might make purchasing a property more affordable, interest rates continue to climb and make mortgage costs higher by a significant margin.

Another is that, while lower Stamp Duty might be designed to stimulate economic growth, quality properties in high-demand areas are already scarce. Cheaper purchasing costs do not necessarily make owners more likely to sell.

There may be an advantage for portfolio landlords looking to diversify their properties or purchase a range of property types, with possibly more availability in an active market.

Depending on how the market responds, it may be easier to sell assets, complete sales faster, and achieve a higher sale value.

Stamp Duty vs Property Prices

During the Stamp Duty holiday, we saw sudden and considerable increases in property values. However, this was partly driven by the transition to working-from-home models and demand for homes in more rural areas outside of the claustrophobia of urban lockdowns and isolation.

However, some forecasts indicate that these reduced Stamp Duty rates might inflate property prices further.

The Office for National Statistics reports that UK average house prices grew 15.5% in the 12 months to July 2022, resulting in a nationwide average cost of £292,118, up from £230,332 before the pandemic began in March 2020.

Higher property sale prices might mean that the Stamp Duty saving doesn’t have a material impact on the cost of investing in a new property, particularly if inflation and interest rates continue upward.

Property-Specific Mini-Budget Announcements

Of course, Stamp Duty is just one part of the puzzle. The forthcoming reform to the planning system, expected to streamline planning processes for developers, may significantly affect the housing supply.

New Investment Zones will provide tax reliefs to encourage developers or property investors to construct new homes, with exemptions on Stamp Duty for commercial properties.

During last week’s speech, the chancellor confirmed that more detail about these policies would be released shortly.

Other favourable news includes:

• Reductions in the basic rate tax band from 20% to 19% from April 2023.
• The scrapping of the highest 45% additional rate tax band.
• Cancelled increase in Corporation Tax for companies earning over a certain threshold – Corporation Tax will remain at 19%, the lowest rate within the G20.

Lower taxes will be a positive for landlords, regardless of whether they manage one property as a self-employed business or own a larger portfolio through a limited company.

Reduced exposure to Corporation Tax likely means that many more landlords will opt to incorporate their businesses, opening up access to higher tax-deductible expenses. Costs such as mortgage interest – a not insignificant cost – are fully deductible for limited companies.

Changes to National Insurance Rates

National Insurance increased by 1.25% in April 2022 and was due to be replaced by the new ‘Health and Social Care Levy’ in April 2023 – this higher contribution rate has been reversed, with rates dropping down from 6th November of this year.

The outcome is that landlords will pay lower taxes on several fronts, with the policy returning around £330 per year per taxpayer and benefiting 28 million UK households.

Cuts in Income Tax Rates

Rishi Sunak originally pledged to reduce Income Tax by 1% last March, which was planned for 2024. Now, basic rate tax will be charged at 19%, rather than 20%, from April 2023, reducing Income Tax rates for all earnings between £12,571 and £50,270.

This adjustment is the first time that basic rates taxes have been reduced since the 2008-09-tax year and will provide relief of around £5 billion. Scrapping the highest 45% tax band benefits taxpayers earning over £150,000 annually, so all income from £50,271 and above will now be taxed at 40%.

Again, the outcome for landlords is a lower tax bill, reducing the amount of tax payable against profits from buy-to-let property rentals.

Cost of Living Support for Renters

Reductions to Income Tax and National Insurance contributions benefit every taxpayer, including renters. The aim is to make finances more manageable with lower Stamp Duty thresholds, greater tax relief for first-time buyers, and lower National Insurance and Income Tax rates.

Although some of the changes only benefit the highest income earners, the hope is that renters struggling with rising living costs will find it easier to maintain rental payments.

This news is accompanied by the announcement of a cap on residential energy prices, which should also go some way to preventing tenants from facing ever-growing bills without wage growth to keep pace.

Last week’s announcement is an interim budget. In normal circumstances, the government delivers two budgets per year – we are therefore still expecting a full budget before the end of this year. More detail about the plans for tax reforms and long-term spending is expected in the coming weeks – but in the meantime, we will keep you informed about further news as we receive it.

If you would like guidance about how reforms to UK planning rules, Stamp Duty thresholds, or taxation schemes affect your property rentals or portfolio, please contact Tod Anstee lettings at your convenience for an informal chat.