Industry News James Wood 29/10/2021

Autumn budget 2021 roundup

After years of tax rises, this year’s budget was relatively quiet for landlords, with no tax rises announced for the sector. There were even some positive changes for landlords who have recently sold as well as some tenants in receipt of Universal Credit.

From October 27 2021, landlords will be given more time to pay capital gains tax after a property sale. The property payment window for residential sales will increase from 30 to 60 days, making it easier to file and pay any capital gains tax on a residential property.

Similarly, landlords earning over £10,000 will be given more time to come to grips with Making tax Digital (MTD). MTD for Income Tax Self-Assessment (ITSA) will now be introduced from 6th April 2024

Tenants who work and are in receipt of Universal Credit will also be better off, with the taper rate for Universal Credit payments cut from 63% to 55%. This change is set to come on December 1st 2021.

While this change will only affect tenants who claim Universal Credit and are in work, the Government has recently made available an additional £65 million to local authorities to prevent homelessness. As a result, landlords of tenants who are still in financial difficulty should encourage their tenants to contact the local authority to see if they can provide financial assistance.

In addition to this, £17 million  has been made available to cover  the housing costs of Afghan refugees  over the next five years. As this may lead to an increased number of local authorities setting up housing schemes for these refugees, landlords may want to contact their local authority or sign up to the Government’s Housing Portal if they would like to provide a property.

Individual landlord tax payments 2023/2024 tax year

Typically, the average landlord owns 1 or 2 properties and has a salary to supplement their rental income. Provided this income is below £50,000, then landlords can expect to pay 20% tax on any income above the personal threshold of £12,750.

When calculating this income the interest on mortgages cannot be offset from the rental income. However, landlords can claim a deduction equivalent to 20% of the mortgage payments. They may deduct their other expenses, such as those which go towards the replacement of furniture, however.

As an example, a landlord with 2 properties in their own name has –

Salary: £21,000

Rental Income: £15,000

Expenses: £3,000

Mortgage payments: £6,000 

In the above scenario the landlord would pay £1200 on their rental income based on the following calculations -

  • £15,000 (rental income) - £3,000 (expenses) = £12,000
  • £12,000 * 0.2 = £2,400
  • £2,400 - £1,200 (Mortgage payments * 0.2) = £1,200

Limited Company from 2023/24 tax year

For limited company landlords the arrangement is very different as landlords pay corporation tax rather than income tax, and they may offset the full mortgage interest as an expense when calculating their taxable income.

In light of the changes to mortgage interest relief, incorporating as a Ltd company has become more attractive as an option. However, it isn’t always the best course of action  for landlords.

If the landlord in the previous scenario had incorporated as a limited company they would owe £1500 on the same income.

  • The taxable profit is £6000 (£15,000 - £6,000 in mortgage interest and £3000 in other expenses)
  • Tax on £6000 at 25% = £1,500

At this point the landlord is already £300 worse off if they have incorporated.

However, if the landlord wants to spend the remaining £4,500 and there is no Directors loan to draw on, they would then pay a further dividend tax at 8.75% on anything above the £2,000 tax free dividend allowance.

In this case, that means the landlord would end up paying an additional £218.75 in tax (2500 * .0875), leaving them £518.75 worse off overall vs holding the property in their own name.

For higher rate taxpayers this would be very different and Ltd companies do become more attractive as income grows. Particularly where the landlord is just starting to invest in property.

Seeking advice

Landlords should always seek specialist tax advice before they decide whether incorporation is the right choice for them. Particularly where it would involve transferring ownership of a property from their own name into a Limited company.

The area is complex and needs to be considered on a case by case basis by an experienced professional like those found at Less Tax for Landlords.

James Wood

James Wood Head of Policy

James Wood, LLB, is the NRLA’s Head of Policy. James has provided legally sound advice to thousands of landlords for more than six years, along with producing the organisation’s guides and documents and training the organisation’s highly rated advice service.

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