The Taxing problems of a residential landlord

Many landlords have sold their rented properties in 2022.  Most claim residential properties are no longer an attractive investment, mainly because of the spate of unfavourable changes in the taxes on such properties.  These taxes are charged at the point of purchase, sale and in every year between these two points, so penalising landlords throughout their period of ownership.

Purchase

The Government introduced a 3% additional stamp duty charge in 2016 on those properties bought by landlords and not home occupiers.  This means that landlords are expected to pay the standard rate of stamp duty plus a 3% premium on the purchase price of the property.  In contrast, the stamp duty on purchasing shares, for example, is 0.5% of the purchase price.

Sale

Most people who own a home will not pay any capital gains tax on the sale.  However, landlords are charged a capital gains tax based on the difference between the sale price (less disposal costs) and the property acquisition price (including improvement costs and acquisition cost) of their rented properties.  The tax on the capital gain is charged at 18% or 28% if the landlord is a basic or higher rate taxpayer respectively (and must be paid within 60 days of sale), whereas on most other types of capital investment the capital gain is 10% and 20% for a basic or higher rate taxpayer (and usually has to be paid by 31 January following the 5 April year-end).  These matters yet again discourage investors from focussing on residential property.

Rental Income

The Government launched a consultation on 31 August 2022 to invite views from social housing tenants and landlords on a proposed rent cap.  This could be broadened to include a private housing rental cap.  The Scottish Government has already imposed a rental gap, effectively freezing rent, from September 2022 to 31 March 2023.  Private landlords claim such capping is unfair and divisive.  Very few other businesses or investments experience such caps.

Rental Costs

The Government has significantly reduced the allowable taxable expenses that can be charged against a landlord’s rent.  The ten per cent wear and tear allowance, based on 10% of the yearly rent, was discontinued over 5 years ago.  The original cost of furniture and white goods, for example, can no longer be charged as an expense.  The cost of referencing and setting up new tenancies is now charged to the landlord and not the tenant.  Mortgage tax relief has dropped from a landlord’s marginal rate of tax to basic rate only, which is a significant issue, especially at a time of much higher mortgage interest rates.  These changes mean the actual costs for a landlord have increased at a time the Government has reduced the amount that can be claimed as tax deductible costs and may be considering capping rent increases. 

All these taxing changes mean it is no surprise landlords are selling up and rental stock is falling. 

The Tax Team

Finance, Accounting and Economics Department