Ashford Landlords’ £6.6m Tax Bill

snip1

I am asking Damian Green the longstanding Conservative MP for Ashford to remind new Chancellor Rishi Sunak and PM Boris Johnson to use their persuasive skills to highlight and take a more holistic approach and attitude to the private rented sector and thus tackle issues affecting Ashford landlords’ ability and capacity to run an effective buy-to-let business:

For some thirty years, the Government have abdicated the responsibility of housing the masses from local (council housing) authorities to the estimated 1.5 million buy-to-let landlords.

However, since 2015/16, Ashford landlords have faced increasing tax burdens as each year goes by, with the removal of mortgage interest rate relief on income tax (Section 24), the introduction of the 3% surcharge on stamp duty, and the reduction of the letting relief on capital gains tax.

My research has calculated the total income tax contribution by 1,748 Ashford private landlords in the tax year 2015/16 was £4,562,481

However, the eradication of higher rate mortgage interest relief (also known as Section 24) announced in 2015 by George Osborne has been estimated to add a further £1.9 billion nationally to landlords’ tax liabilities. Whilst raising money from landlords is an easy target, and the tax receipts are attractive for the Government – such a shortsighted policy is likely to seriously impact the supply of available rental property over the short and medium term – which will be very good news for landlords’ rental yields! 

And by 2021/2, when the full extent of  Section 24 relief kicks in, that income tax liability will rise to £6,661,222.

This doesn’t take into account additional liabilities such as Capital Gains Tax, the additional 3% on top of the prevailing Stamp Duty Land Tax and VAT.

Ambiguity and lack of certainty is the foe of all investment, as has been seen with Brexit. Now, just as things are starting to get rosy in Q1 with pent-up demand being released with the ‘Boris Bounce’, the last thing we need is for the Government to see landlords as a constant cash cow – it is imperative the Government acknowledges the value private landlords offers the UK in housing over of 9.45 million people in the country.

Westminster needs to take a far more balanced approach to the significant issues of landlords’ rights of possession, taxation and energy efficiency, and recognise the service the private rented sector offers to the country in effectively housing over a fifth of households and avoid the unintentional consequences of making renting a property harder for tenants… because, the way things are currently going against landlords, it is not financially attractive to invest in buy-to-let property unless able to do so without a mortgage!

Ashford Council Tax Payers Stung by 60.10% Rise Above Inflation

 

Buying and selling a home in Ashford isn’t the simplest or cheapest thing you will ever do. Estate Agent fees, Solicitors fees, Survey fees, Mortgage fees, Furniture Removals… the costs just mount up at every step of the process.

Last week, an Ashford landlord asked me whether the Council Tax Band made any great difference to a property’s appeal, either to a tenant or a potential owner-occupier, when it comes to being offered on the market and whether extensions or improvements made a difference to the tax banding?

Well, like I said, the first point is you should always be aware of what Council Tax Band your new house or apartment will fall under. Being aware of this before you buy/move will help when planning monthly expenditure in your home (or investment). But what exactly are the Council Tax Bands, and how do they affect landlords/tenants/homebuyers?

How much Council Tax you pay depends on two variables. The first is which Council Tax Band your Ashford property is in: A property is placed into a specific band depending upon what the value of the property was in April 1991 – the date when the tax band system was applied. In a nutshell, what your property is worth today has no relevance whatsoever to your banding.

Council Tax Bands have a letter of the alphabet and range from bands A-H.

The Council Tax Band values are:
Band A – up to £40,000
Band B – £40,001 to £52,000
Band C – £52,001 to £68,000
Band D – £68,001 to £88,000
Band E – £88,001 to £120,000
Band F – £120,001 to £160,000
Band G – £160,001 to £320,000
Band H – more than £320,000

So, for example, if a property sold for £110,000 in April 1991 but is now worth £350,000 it will remain in Band E – NOT Band H), as this was the value when the bands were set in 1991. For new homes, the same thing applies: they are valued based on an assessed 1991 market value. This safeguards that all homes and all buyers are treated equally and consistently. The second factor that determines how much Council Tax you pay is what each individual local authority decides each band will pay in Council Tax. (So for example, a householder/tenant in Leeds in a Band E property will pay a different amount in Council Tax each year to someone in Swindon or North London in Band E).

Interestingly, the average current level of Council tax paid by Ashford people stands at £1,361 per annum, up from £447 in 1993 (although if it had only risen by inflation over those 25 years… today that would only be £850) meaning Ashford Council Tax has outstripped inflation by 60.10%. So unless the local authority changes its majority political party, the only way you can change the amount you pay in Council Tax is your banding i.e. you physically move to a higher or lower band.

Ashford council tax increases outstrip inflation by 60%

 

Contrary to what most people think, extensions and improvements do not automatically change the Council Tax Band and existing householders/tenants only have to pay the same Council Tax as they would have without any extensions and improvements. However, the Valuation Office (The Government’s Property Valuers) do reserve the right to re-value the extended property if the property gets sold.

If you are a potential buyer, you should be aware of this review as it could change the amount of Council Tax you pay after the purchase. If a higher band is necessary, the new band will be based on what the extended property would have been expected to sell for in 1991. However, this does not necessarily mean that the banding will jump one band, as this is contingent on the extent of the changes and whether the property falls towards the top or bottom of its existing band. More often than not – it isn’t an issue and the banding stays the same.

In terms of which band a property is in, this can be challenged, usually upon change of ownership. In my experience in the Ashford property market the only issue is one where there is an apparent anomaly with the banding, with one property being in a different band to other similar homes in the street. This is much rarer than it used to be, as most such anomalies have been found and rectified over the years. Anyone can check the banding of any property by going to Google and typing in “Check My Council Tax Banding”.

I do need to mention one word of warning though – challenging the Council Tax Band is not something to do on a whim for one simple fact – you cannot request your band to be lowered, only for the property to be ‘reassessed’, which also risks your band being moved up rather than down. I have even heard of neighbouring properties’ bands being increased as a result of someone’s appeal, although this is a rare exception! If you have any questions don’t hesitate to drop me a line.

4,545 Ashford Landlords – Is This a Legal Tax Loop-Hole?

Owning Property Within a Limited Company may be More Tax Efficient for BTL Landlords

In November 2015, George Osborne disclosed plans to restrain the buy-to-let (BTL) market, implying that, as a result of the sector’s growing attractiveness first time buyers were having to compete with landlords for the restricted number of properties on the market. One of things brought in was that tax relief on BTL mortgages would be capped, starting April 2017. Before April 2017, a private landlord could claim tax relief from their interest on their BTL mortgage at the rate they paid income tax – (i.e. 20% basic /40% higher rate and 45% additional rate).

So, for example, let’s say we have an Ashford landlord, a high rate tax payer who has a BTL investment where the rent is £900 a month and the mortgage is £600 per month. In the tax year just gone (16/17), assuming no other costs or allowable items …

• Annual rental income £10,800.
• Taxable rental income would be £3600 after tax relief on mortgage interest
• Meaning they would pay £1,440 income tax on the rental income

And assuming no other changes … the landlord would have income tax liabilites (at the time of writing May 2017) in the coming tax years of …

• (17/18) £1,800
• (18/19) £2,160
• (19/20) £2,520
• (20/21) £2,880

Landlords who are higher rate tax payers are going to have be a lot smarter with their BTL investments and ensure they maximise their rental properties full rental capability. However, there is another option for landlords.

Sell (to Yourself)

The Ashford landlords who own the 4,545 rental properties in the town could set up a Limited Company and sell their property to that Limited Company

In fact, looking at the numbers from Companies House – many landlords are doing this. In the UK, there are 93,262 Buy To Let Limited Companies, and since the announcement in November 2015 – the numbers have seen a massive rise.

• Q2 2015 / Q3 2015 – 4,193 Buy to Let Limited Companies Set Up
• Q4 2015 / Q1 2016 – 5,403 Buy to Let Limited Companies Set Up
• Q2 2016 / Q3 2016 – 3,007 Buy to Let Limited Companies Set Up
• Q4 2016 / Q1 2017 – 7,149 Buy to Let Limited Companies Set Up

New Buy to Let Limited Companies

So, by selling their buy to let investments to their own limited company, owned 100% by them, these landlords could then offset the costs of running their BTL’s as an ‘allowable expense’ – effectively writing off the cost of 100% of their mortgage outgoings, wear and tear and upkeep, letting agents’ fees etc.

I am undeniably seeing more Ashford landlords approach me for my thoughts on setting up a BTL limited company, so should you make the change to a limited company?

Long Term Benefits

In fact, I have done some extensive research with companies house in the 15 months (1st January 2016 to 31st March 2017 and 136 Buy To Let Limited Companies have been set up in the TN postcode alone).

If you are looking to hold your BTL investments for a long time it could be very favourable to take the short-term pain of putting your BTL’s in a limited company for a long-term gain. You see, there are huge tax advantages to swapping property ownership into a limited company but there are some costs that go with the privilege.

As the law sees the new Limited Company as a separate entity to yourself, you are legally selling your BTL property to your Limited Company, just like you would be selling it on the open market. Your Limited company would have to pay Stamp Duty on the purchase and if you (as an individual) made a profit from the original purchase price, there could be a capital gains tax liability of 18% to 28%. Existing mortgages might need to be redeemed and renegotiated (with appropriate exit charges).

On a more positive note, what I have seen from incorporating (setting up the Limited Company) is that landlords can roll up all their individual buy to let mortgages into one loan, often meaning they benefit from a lower interest rate and the ability to advance new purchase capital. Finally, if the tax liability is too high to swap to a limited company, some savvy buy to let investors are leaving their existing portfolios in their personal name whilst purchasing any new investment through a limited company? (Just an idea not advice!).

Get Professional Advice

It’s vital that landlords get the very best guidance and information from qualified tax consultants. Whatever you do, always get the tax consultant’s guidance in writing and, as always, do not hurry into making any hasty decisions. The modifications to BTL tax relief are being progressively eased in over the next three years so there is no need to be unnerved and rush into any decisions before finding out the specifics as they relate precisely to your personal situation, because with decent tax planning (from a tax consultant) and good rental / BTL portfolio management (which I can help you with) … whatever you do – keep on the right side of the line!

For more information on the Ashford property market, visit the Ashford Property News Blog

Taylors Residential Lettings Limited, Company no. 6002742, Regd Office: Suite 1, Invicta Business Centre, Monument Way, Ashford TN24 0HB