By Rana Miah
The dust has settled on another Budget and it seems the “surprise” sugar tax, which was supposed to grab the headlines, has been completely overshadowed by the controversy surrounding the proposed cuts to disability benefits.
The chancellor, George Osborne, has since accepted that the Treasury’s plan to cut the Personal Independence Payment (PIP) and save £4 billion was “a mistake”.
The proposal has now been scrapped.
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It seems Mr Osborne will need to find some other way of balancing the books, so he can reduce corporation tax to a level where Google, Amazon and Starbucks might actually consider paying it!
It’s unlikely buy-to-let property investors will be able to force the government to back down over the severe restrictions being placed upon their industry.
The Challenges Facing Buy-to-Let Investors
The Budget on 16th March confirmed the announcement in last year’s Autumn Statement that buy-to-let was heading for a serious shake up. Not only have important lenders within the sector (including Barclays) tightened their lending criteria, but landlords and owners of second homes will also have to stump up an additional 3% in stamp duty across all bands from April 2016.
Compounding their misery, wealthier buy-to-let landlords are also going to see their tax relief cut to a flat rate of 20% from 2017 – down from the 40% or 45% they currently enjoy.
Buy-to-let landlords owning more than 15 residential properties were hoping to be exempt from the stamp duty increase, but Mr Osborne announced that wouldn’t be the case. He also announced that gains from residential property would not be subject to the new, lower rates of Capital Gains Tax (CGT).
Basic rate taxpayers will now pay 10% rather than 18% and higher rate taxpayers will pay 20% rather than 28%. Trust CGT will also be reduced from 28% to 20%. The annual tax-free allowance for capital gains remains at £11,100.
Interestingly, gains from commercial property will be able to take advantage of the lower CGT rates, and there’ll be less stamp duty to pay on commercial properties worth up to £1 million. This could result in more investors entering the commercial market.
So, are residential buy-to-let investors justified in thinking they’ve been the hardest hit by the chancellor’s new property legislation?
Annual Tax on Enveloped Dwellings Extended
Not that it’s a competition, but gains relating to Annual Tax on Enveloped Dwellings (ATED) are also exempt from the lower CGT rates and will be subject to the higher rate of 28%.
ATED is an annual tax payable by companies, partnerships (where one of the partners is a company) and collective investment schemes (e.g. a unit trust or an open-ended investment vehicle) that own UK residential property.
Qualifying properties, or “dwellings”, are places where all or part is used, or could be used, as a residence, including any gardens, grounds or buildings within them. Properties which are not classed as dwellings include:
- Hotels and guest houses
- Boarding schools and student halls of residence
- Hospitals and care homes
- Military accommodation
Two years ago, only qualifying properties worth more than £2 million were subject to ATED. Last year, the threshold was lowered to £1 million, and as of 1st April 2016, it’ll halve again to £500,000. A new annual charge of £3,500 has been introduced for properties valued between £500,000 and £1 million, and companies only have until 30th April 2016 to pay it.
The annual charges for 2016/17 are as follows:
- Properties valued at more than £500,000 but not more than £1 million: £3,500
- Properties valued at more than £1 million but not more than £2 million: £7,000
- Properties valued at more than £2 million but not more than £5 million: £23,350
- Properties valued at more than £5 million but not more than £10 million: £54,450
- Properties valued at more than £10 million but not more than £20 million: £109,050
- Properties valued at more than £20 million: £218,200
Aside from the new £500k bracket, the bands and rates are the same as last year. However, today’s figures represent a 34% increase on 2014/15 figures, which had only increased by 2.6% between 2013/14 to 2014/15.
Stamp Duty Land Tax (SDLT) is also payable on these properties, charged at a premium rate of 15%. Certain properties are exempt from the 15% rate and only have to pay SDLT at 7%. These include properties purchased by a company acting as a trustee of a settlement or properties to be used for:
- a property rental business
- property developers and property traders
- property open to the public for at least 28 days a year
- financial institutions acquiring property in the course of lending
- property occupied by employees
- social housing
These types of property can also claim relief on ATED.
Have Companies Had It Too Good for Too Long?
I have a lot of sympathy for professional landlords operating in the private rental sector who feel they’ve been “knifed in the back” by the conservatives, but the recent changes to ATED appear to be an even bigger scandal.
I’m surprised these dramatic increases and extensions have slipped through with barely a comment, but I suspect it’s because they affect companies rather than individuals.
One could also make the argument that the previous ATED bands and charges were lower than they should have been, so the Treasury has simply increased tax for those who can most afford to pay it.
I’m not sure the same can be said for private landlords, the majority of whom are providing affordable rented accommodation for those who can’t afford to buy. Only time will tell if the government’s punitive measures on buy-to-let will mean rents will increase across the board, making renters the real victims.