A Preview of the Budget: How will it affect your BTL portfolio?

Despite us all having to wait until 3rd March to know for definite, we’re taking a look into the murmurings about what could be to come. In the latest preview of the Budget, it seems the government is targeting the rental market and landlords. The changes to mortgage interest restrictions for individuals have hugely reduced property investors’ profit margins; thus, some are considering new ways to structure their portfolios in the coming future.

Rumours around the spring Budget predict a rise in taxes across the board to fund the government’s COVID-19 support. Many, therefore, are expecting to see increases in Capital Gains Tax (CGT). If these rumours are to be believed, then the rates could increase in line with income tax. This is not welcomed news to landlords whose profits have already been reduced in recent years.

For BTL landlords, it might be time to consider changing your portfolio and getting more profitable investments in the works now.

Currently, once a portfolio is held in a corporate wrapper, it can benefit from a full dedication for its mortgage interest costs. Companies are subject to lower corporation tax rates on profits and disposal, and they have limited liability, giving landlords another layer of protection.

The main concern for investors, before a transfer occurs, is whether they will need to pay significant Stamp Duty Land Tax (SDLT) as well as CGT. Typically, these are charged at the market value at the date of transfer between the two parties. This means obtaining valuations as evidence is critical.

For some property investors, full relief from SDLT and CGT may be available if certain conditions are met. However, this would be a complicated process. A decision would be made case-by-case, so it is likely this won’t apply to every investment.

Property investors with residential portfolios can still benefit from the temporary Stamp Duty holiday, which is in place until 31st March 2021. The holiday reduces the SDLT rate to 0% for the first £500,000 of the purchase prices. However, it does not take into consideration the 3% surcharge applicable to companies purchasing residential property.

Property investors should consider making investments now before the SDLT holiday ends. These holiday rates can be combined with multiple dwellings relief (MDR), which can reduce potential liability up to £15,000 per additional property. This relief enables an investor to apply SDLT to the mean value of the purchased dwellings instead of paying the SDLT on the actual value associated with each one.

Portfolios with residential and commercial properties can also benefit from reduced SDLT after HMRC brought in changes in November 2020. These updates allow investors to avoid the 3% surcharge if MDR is applied to the residential element. CGT is chargeable, however, on the uplift in value from the original purchase price. If these rumours of the spring Budget are to be believed, then it’s highly possible that the CGT rate will rise in the future. If any investments are likely to trigger a CGT liability, then it’s recommended that you complete transactions now.

The preview of the Budget has shown us that BTL investors are likely to suffer a further reduction in profits if and when tax rises. And while this increase in tax – and the end of the SDLT holiday – will affect residential and commercial property investors also, the impact will be considerably less. So, investors should look at their portfolios and consider what changes need to be made for the future.

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