14:11 PM, 11th March 2020, About 2 years ago 11
Chancellor of the Exchequer Rishi Sunak’s first Budget speech concentrated on bringing stability and security to the country using £12bn of fiscal action to combat the temporary effects of Coronavirus. The NHS was promised whatever resources it needed to tackle the virus with a £5bn response fund put aside.
For individuals Statutory Sick Pay (SSP) will be extended for those advised to self-isolate, and those caring for others who self-isolate, and support through the welfare system for those who cannot claim SSP, as well as a hardship fund.
Support for businesses includes expanded Business Rates reliefs, a Coronavirus Business Interruption Loan Scheme to support up to a further £1 billion lending to SMEs, a £2.2 billion grant scheme for small businesses, and a dedicated helpline for those who need a deferral period on their tax liabilities.
The budget was also huge in terms of fiscal investment into the economy with more than £600bn to be injected into infrastructure over the next 5 years.
For more direct policies affecting landlords, the property market and taxation the Chancellor confirmed:
A Stamp duty surcharge of 2% will be applied to non-UK residents purchasing property. However, this will not affect UK Ltd companies where shareholders may live abroad.
Corporation tax as previously announced will not be reduced further and will remain at 19% to help fund the NHS.
The National Insurance contributions threshold will be increased from £8632 to £9,500 saving just over £100 per year.
Entrepreneurs relief will be reduced from a £10m to £1m life time limit per person
£12bn will be available for affordable housing including Social housing
The Building Safety fund will receive £1bn to tackle all forms of unsafe high rise cladding
£643m for action to reduce rough sleeping providing accommodation and support services to help people off the streets.
Fuel duty has been frozen once more this year along with all alcohol duties.
As of 6th April 2020 private landlords (including Members of Partnerships and LLP’s) will not be able to treat any of their finance costs as a business expense. This includes both interest and arrangement fees. Instead, they will receive a tax credit of just 20% of their finance costs in order to reduce their tax bill.
This Case Study explains why so many property rental business owners are considering incorporation, by comparing the tax position of a private landlord vs that of a private hotelier:
The hotelier will pay £7,500 of income tax. This is broken down as follows; £nil on his first £12,500 of net profit and 20% tax on the next £37,500.
However, the private landlord cannot treat his finance costs as a legitimate cost of business in the same way as the hotelier. Accordingly, his tax bill is £27,500.
This is because his taxable income is treated as being £125,000 due to being unable to claim his finance costs as business expenses. Furthermore, for every £2 of taxable income over £100,000 he loses £1 of his nil rate tax band.
Accordingly, the landlord pays tax at a rate of 20% on the first £37,500 (which equates to £7,500) and then 40% tax on the other £87,500 (which equates to £35,000). This adds up to a whopping £42,500.
The government then grant him a tax credit equal to 20% of his finance costs, in other words £15,000 off the £42,500 leaving him with a net £27,500 of tax to pay.
To summarise, the private landlord pays nearly four times as much tax as the private hotelier, even though their financing costs and business results otherwise produce identical levels of actual profit.
HOWEVER, if both the landlord and the hotelier operated their businesses within a Limited Company structure, they would pay exactly the same amount of tax.