While the latest budget, announced by the Chancellor Rachel Reeves on 30th October, certainly introduced more tax hikes, it wasn’t as bad for landlords as some had predicted.
The key predictions ahead of the Autumn Budget were that Labour would raise capital gains and inheritance tax, so when it was revealed that both would remain unchanged for property investments, it was something of a relief.
The one tax increase that will have a direct and immediate impact on landlords is the raising of the higher rate Stamp Duty Land Tax that applies to the purchase of any residential property if it means you’ll own more than one.
The surcharge in England was raised immediately, from midnight on 30th October, from 3% to 5%, meaning every landlord with a property purchase underway at the time has found themselves having to find more money to invest – albeit initially – due to the extra stamp duty funds, which are payable to HMRC within 14 days of completion. However, it’s important to remember that Stamp Duty Land Tax (SDLT) can be deducted from your costs when calculating Capital Gains Tax (CGT).
Another thing to note is that, in addition to the increase in the higher rate, the zero-rate threshold will drop back to £125,000 from 1st April next year, with a 2% rate applied to the portion between £125,001 and £250,000.
So, how much more is stamp duty going to cost landlords now and next year, and exactly how big an issue is this tax rise?
Currently, you will pay £6,000 more in stamp duty for a £300,000 property than you would have before the Budget, and that will rise by another £2,500 next April.
Although initially this obviously represents an increase in the up-front cost of investing, we believe it’s important to look at it within the context of the investment over time, especially if you are likely to sell the property in the future.
Most professional landlords hold rental properties for at least 15 years, so the extra tax cost in our example averages out to around £500 a year, which is roughly just £40 a month.
Meanwhile, most landlords will make good profits from rental income and gross yields in the UK currently range between between 5% and 7.5% (Statista).
Although Zoopla reports that annual rental inflation for new lets has slowed to 5.4% - the lowest for almost three years – that is still well over twice the rate of inflation, meaning even taking into account the higher cost of SDLT, landlords’ can still make a profit.
In addition, it’s important to take into account the growth in property prices which – provided you carry out solid market research before buying – should deliver competitive capital returns over time.
So, while it’s not great news that initial purchase costs have increased, it’s certainly not something that should discourage landlords from investing. And if you need any more reassurance, it’s worth remembering that Scotland has had an Additional Dwelling Supplement of 6% for the last two years, and the rental market is still active.
Try our free Stamp Duty Land Tax calculator
From the Government’s perspective, Labour has been loud and clear on their commitment to boost new home building and solve the housing crisis and says that this stamp duty increase is intended to “provide those looking to move home, or purchase their first property, with a comparative advantage over second home buyers, landlords, and businesses purchasing residential property”.
But we would conclude that if it does indeed put some landlords off making new investments or even encourages them to sell up and exit the market, it will only make the housing crisis worse.
There is a serious shortage of social housing and around a million eligible households are currently living in the PRS. If private rented stock reduces, this will almost certainly result in more households requiring temporary accommodation and increased homelessness, and, ironically boost landlords returns.
Other key changes announced in the Budget
We have stated below the changes from the budget, but it’s important to seek personal and professional, qualified financial and tax advice when working out how much tax you owe now and in the future.
Capital Gains Tax (CGT) increase for assets other than property
A frustration for landlords over recent years has been that while CGT rates were reduced in 2016 for all other asset gains (to 10% at the basic rate and 20% at the higher rate), rates for residential property remained at 18% and 28% - although the higher rate was reduced to 24% from 6th April 2024.
Inheritance tax (IHT) reforms
Business and agricultural property relief, which is currently available at 100% for qualifying estates, will be restricted to the first £1m from April 2026, after which it will reduce to 50%.
This means businesses and farms with assets worth over £1m will no longer be able to be passed on tax free. The Country Land and Business Association estimates that this could harm 70,000 UK farms, “damaging family businesses, destabilising food security and jeopardising the future of rural businesses up and down the country.”
And, from April 2027, inherited pension pots will be subject to IHT for the first time, in an effort to stop pensions being used as a tax planning vehicle, rather than simply as a means of funding retirement.
With these changes, the Government is estimating £2 billion can be raised to support public services.
In addition, it was announced that the current IHT threshold of £325,000 (with an additional £175,000 allowance for a residential home inherited by direct descendants), which has been unchanged since 2009, will remain until April 2030. This extended freezing of the level at which IHT becomes payable while inflation is continuing to rise, effectively means the tax-free allowance is falling further in value.
Changes to income and benefits from April 2025
There will be two positive changes for those at the lower end of the earnings spectrum:
- The minimum wage will rise from £11.44 an hour to £12.20 for over-21s, and from £8.10 to £10 for 18 to 21-year-olds.
- The earnings limit for carers will increase to the equivalent of 16 hours a week at the National Living Wage, which is worth an additional £45 a week. This means they will be able to earn over £10,000 while receiving Carer’s Allowance.
This should help those benefitting to afford housing costs, which is good news for their landlords. What isn’t good news is that housing benefit payments will be frozen next year, for at least another year. The Joseph Rowntree Foundation estimates that private tenants receiving housing benefits will be £243 a year worse off on average.
Increase to National Insurance (NI) contributions for employers
From April 2025, employers’ NI contributions will rise from 13.8% to 15%. While this was expected, it was a shock to businesses that at the same time the employee’s salary threshold (at which employers have to pay NI) will be reduced from £9,100 to £5,000.
This, combined with the rise in the minimum wage, is bound to hit some businesses hard. However, the Government maintains the move was aimed at increasing tax revenue from larger companies, and has announced two changes to support smaller companies: the Employment Allowance will be increased from £5,000 to £10,500, and the £100,000 eligibility threshold will be removed.
According to the Government, “more than half of employers with NIC liabilities will either see no change or will gain overall next year.”
HMRC will clamp down on tax avoidance and evasion
By pursuing uncollected tax that is owed to the UK, HMRC is aiming to bring in an additional £6.5 billion a year, which the Government has said will go directly to “funding public services and fixing the foundations of the economy”.
With this in mind, if you don’t already work with a tax adviser who is experienced in the area of property investment, it is worth taking some advice to ensure you are meeting your tax obligations – while not paying more than you need to!
It’s also worth knowing that if you have not been paying the tax that you should, disclosing this to HMRC under the Let Property Campaign may reduce the penalty that you have to pay.
Investment in housing and infrastructure
The Chancellor announced further investment into transport and infrastructure and confirmed that Labour is committed to “turbocharging the delivery of 1.5 million homes” over their first five years in government.
- £3 billion of additional support will be provided to SMEs and the Build to Rent sector “by expanding existing housing guarantee schemes to support a strong and diverse private housing market”.
- A new housing package will include an additional £500 million for the Affordable Homes Programme, bringing total investment in the supply of new housing to more than £5 billion.
If Labour is able to meet the new home building target of 300,000 a year, which the previous Conservative Government was unable to do, we may finally start to see the pressure ease on the PRS.
While all laws passed by the UK Parliament apply to England, there are some matters that are devolved to the individual governments of Wales and Northern Ireland. So when there is a budget, not every change announced will apply across the whole UK.
In Northern Ireland, many of the spending commitments announced such as education, health and transport will not apply. Instead, NI will receive a flat sum of £1.5 billion, calculated using the Barnett formula, bringing the Northern Ireland Executive's budget to £18.2 billion.
It is more or less the same in Wales, except for income tax and VAT, which was devolved to Scotland in 2016 but not to the Welsh Assembly.
If you have any questions about the changes announced in the Budget, or you would like to discuss any current or potential Buy to Let investments, we’re always here to help. Contact your local branch here.
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The Reeds Rains Content Marketing Team
