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Government Tax Changes Impact Accidental Landlords

Around 7% of landlords in the UK are “accidental”. They are the landlords who never intended to let out properties. Some are forced into the sector when they can’t sell their home but have to move anyway; others inherited a property and are not yet ready to relinquish it.

In previous years, becoming a landlord has largely been profitable, but the government tax squeeze is beginning to bite deep. A report by This is Money indicates that the number of accidental landlords is falling. In London, the number of accidental landlords has dropped by 2.5%, and in the southeast in general, by 2.3%. There are also signs that the number of landlords selling up is expected to rise as investors rush to beat the latest tax grab on buy to let properties, which comes into effect in March 2020.

Landlords have been caught in the cross-hairs for some time now. Mortgage interest tax relief is being phased out, so landlords with buy to let mortgages will no longer be able to offset their mortgage interest against rental income. By April 2020, landlords can claim a maximum tax credit of 20%. As a result, some landlords will be pushed into a higher tax bracket, potentially causing them to make a loss on their rental properties.

But this is not the only problem landlords have to worry about. In April 2020, two more government tax changes come into play.

Principal Private Residence Tax Relief Increases Landlord Capital Gains Liability

Tax changes to principal private residence relief mean the 18-month exemption that landlords claim currently is being reduced to nine-months. So, landlords will have an extra nine months of capital gains to account for.

Changes to principal private residence relief probably explain why more landlords in London and the southeast are selling up compared to other regions. There, property prices are higher and capital gains are more pronounced. Even a relatively modest property is worth several hundred thousand pounds, which equates to a hefty capital gains tax bill. This is in addition to the extra money landlords now have to pay, thanks to the 3% stamp duty land tax on additional properties. The only saving grace here is that accidental landlords can claim the money back if they sell their second property within three years of reverting back to owning just one property.

Landlords Lose Lettings Relief

Landlords are also losing lettings relief, which lets them claim a tax break of up to £40k when they sell. From April 2020, only landlords who share a rental property with their tenants can claim lettings relief. Relatively few landlords opt to share their rental property with their tenants, but if you choose to rent out a spare room, you can still claim this relief.

Both of these changes will benefit the Chancellor of the Exchequer to the tune of £470m but will have a huge impact on landlords when they sell their rental properties, so it’s not surprising that For Sale boards are popping up everywhere. This is, of course, having an impact on the property market. With more homes coming on to the open market, prices are falling. As a result, many landlords will have no choice but to accept a lower price for their properties if they want to sell up before April 2020.

Rents Fall and Property Prices Rise

The rise in accidental landlords selling up is a boon for buyers, as it makes it easier to find an affordable property, but it’s not such good news for renters. The fall in the number of rental properties in the UK is causing rents to rise. Research carried out by Hamptons International indicates that rents have risen by 1.8% in the last year – the average UK rent was £998 in September. Rents are likely to continue rising as more landlords sell up before the tax changes come into effect in April 2020.

If you’re concerned about the forthcoming tax changes and how they will affect your buy to let business, it’s a good idea to speak to an experienced tax adviser. Research your options before you panic and sell at a loss.

To develop your knowledge on tax take a look at NLA’s Capital Gains Tax course and Landlords Tax course:

Are you selling up to beat the tax changes? Or do you have a contingency plan in place? Let us know what you intend to do before next April. You can leave a comment below or connect with us via social media.

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