Last week we finally heard about the tax changes for 2021/22, following months of rumour about what the government might announce to help stimulate an economic recovery following the pandemic.
For the last few tax years, landlords and property investors have been relatively hard hit by the Budget, with changes to tax relief allowances one of the primary concerns.
The key is always to know what the new regulations and rules mean, to make informed choices and sound judgements.
For example, many property industry professionals chose to incorporate their businesses through limited companies - enjoying a lower rate corporate tax than they would have been liable for as self-employed business people.
In this article, the Revolution Brokers team summarises all the key points that property investors need to know and what they mean for the year ahead.
What News Did the 2021 Budget Confirm for the Property Market?
The big news we have all been waiting for was around the Stamp Duty holiday. We now know that:
- Stamp duty holidays until 31st March have been extended to June 2021.
- From July until October, the £500,000 stamp duty threshold will drop to £250,000.
- As of October 2021, the threshold will revert to £125,000.
While many property experts are calling for a longer extension, this does mean that thousands of investors who have prospective portfolio purchases pending will now have another three months to complete their investments.
However, overseas rental landlords need to be cautious about buying new rental properties. From April, an additional 2% surcharge applies to any non-UK residents.
This levy remains payable even if the property in question falls below the stamp duty threshold, as does the charge for second home purchases.
There was also news about the 95% mortgage guarantee scheme for residential buyers - we've covered that in more detail in a separate article.
What Financial Support is Available for Property Investors?
First up, good news for investment businesses that employ staff. Furlough has been extended to 30th September 2021 - which means that the Coronavirus Job Retention Scheme remains in action.
Employers can still claim up to 80% of employee salaries but will need to pay 10% towards unworked hours from July and 20% from August to the new furlough end date in September.
More good news for self-employed investors, many of whom have been shut out of income support if they became self-employed during 2019-2020 and therefore didn't have a long enough tax filing history to qualify for the Self-Employed Income Support Scheme.
Applicants who filed a 2019-20 tax return can claim in April for up to 80% of their lost profits for the quarter from April - June 2021. The grant is capped at £7,500 per quarter, per applicant.
How is Corporation Tax Changing?
Less positive news around corporation tax - although not as challenging as some of the speculation! Corporation tax rates for British businesses will not increase this year or for the 2022/23 period either.
However, from 2023, the existing regime will change to a tiered process, whereby the tax rate payable by companies will depend on their size and how much profit they make.
- Companies with profits under £50,000 will continue to pay a 19% corporation tax, renamed a Small Business Profits charge.
- Larger firms, earning over £250,000 in profit, will have the rate increased to 25%.
- Organisations falling between the two will receive tax relief on a tapered basis, applying to companies with profits over £50,000 but beneath £250,000.
For property investors, therefore, as a general rule of thumb, it will likely remain most tax-efficient to trade as a limited business (or special purpose vehicle) for the next couple of tax years. Particularly for higher-rate taxpayers, the 19% business rate tax is appealing.
Investors trading as a sole trader or unincorporated business will be liable for income tax at 20% on the basic rate up to £37,500 net income, and at 40% for earnings up to £150,000. The highest income tax band applies to income of over £150,000, at 45%.
We still don't have detail about what the corporation tax bands might look like or on what thresholds the tapered relief will apply. Hence, as we get closer to this new regime, it remains critical for property investors to keep a close eye on what tax rates they are likely to be liable for.
Are There any New Grant Schemes Property Investors Can Apply For?
The government extended many of the pre-existing financial grants schemes last week during the Budget announcement. Business rate holidays, VAT reductions on hospital sector services and apprenticeship schemes have all been extended through to the coming months.
There are a few new initiatives, although primarily aimed at incorporated companies rather than self-employed investors:
- Tax rebates are available for employers who have paid for employee Coronavirus tests.
- Recovery Loans are opening in April with an 80% government guarantee, for applications from £25,000.
- Flexible apprenticeship schemes are launching to support apprentices working in multiple employers in the same sector.
- Help to Grow is provided free training and subsidised resources for digital and management upgrades.
Information that may be more relevant to those property investors who are not trading as a limited company include a freeze on personal allowances. For 2021/22, this has increased to £37,700 but will remain static until April 2026 - which may mean that the additional tax burden makes more investors consider incorporating.
Capital Gains tax is not changing, though, which is positive after lots of media rumblings about potential increases to help meet budget shortfalls. Until 2026, CGT will be exempt up to gains of £12,300.
For the year ahead, much of the Budget news means that a lot won't change, with many allowances, tax rates and contributions caps fixed and frozen for some time to come.
However, now that we know what corporation tax rates will look like, rental landlords have a couple of years to assess the profit value of their portfolios and make decisions about the right trading structure to ensure they are trading as efficiently as possible.
Contact us now to discuss your personal options, Revolution Finance Brokers specialise in commercial and residential finance in Essex, Kent, London and Hertfordshire.