Change to taxation of Landlords
Adapting to the Changes We have illustrated the implications of these changes to the taxation of landlords. Let’s now take a look at some of the options that are available for landlords to adapt: 1. Deleveraging the Portfolio: First, the most obvious “solution”. Many commentators have touted the deleveraging of property portfolios (i.e. selling properties and using the proceeds to repay mortgages) to be the obvious solution for the worst hit landlords. However, the difficulties associated with this approach are often overlooked. Highly leveraged portfolios typically arise from regular refinancing, the cash from which is spent on growing the portfolio further. Where this has occurred over a number of years of ownership and capital growth, there may be insufficient equity – after lending has been repaid – to meet the costs associated with the disposal. We now consider an example of the implications of a sale of a highly leveraged property.
Example Disposals – Dan’s Position on Sale of Properties Dan, is a higher rate taxpayer who is selling part of his portfolio to help deleverage. The property in question has been owned since 1990, during which time the value has increased from £100,000 to £350,000. Dan has regularly refinanced and used these funds to expand his portfolio, with the property currently subject to a mortgage of £300,000. The implications of a sale are detailed below: Tax Position: Overall Position: Proceeds on sale: £ 350,000 Proceeds on sale: £ 350,000 Base cost: £(100,000) Mortgage Repayment: £(300,000) Taxable Gain £ 250,000 Taxable Gain £ 250,000 CGT @ 28%: £ (70,000) CGT @ 28%: £ (70,000) This represents a net loss of £20,000 on sale of the properties. We can see that, for Dan and other landlords in this position, a sale of a property isn’t always going to improve the position (and can even make matters worse). Unfortunately those worst hit by these changes – landlords with highly leveraged property portfolios – will be those with the least flexibility to reduce lending. Clients are advised to look closely at their portfolio when identifying suitable properties for disposal, in light of the tax as well as commercial implications. As a final thought in this area, it is worth considering that improving the equity to lending ratio on property portfolios may ultimately not be the decision of the landlords. Given the implications of these changes on profitability of rental investments, lenders are expected to become more stringent in their lending criteria.
- Page 1 and 2: Changes to the Taxation of Landlord
- Page 3 and 4: Current position First the basics.
- Page 5 and 6: Understanding the changes From Apri
- Page 7: Example Additional Rate - Bob’s P
- Page 11 and 12: Example Incorporation - Iain’s Po
- Page 13 and 14: Adapting to the Changes Continued..
- Page 15: Final thoughts In summary, the rece
Adapting <strong>to</strong><br />
the <strong>Change</strong>s<br />
We have illustrated the implications <strong>of</strong><br />
these changes <strong>to</strong> the <strong>taxation</strong> <strong>of</strong><br />
landlords.<br />
Let’s now take a look at some <strong>of</strong> the<br />
options that are available for landlords <strong>to</strong><br />
adapt:<br />
1. Deleveraging the Portfolio:<br />
First, the most obvious “solution”. Many<br />
commenta<strong>to</strong>rs have <strong>to</strong>uted the<br />
deleveraging <strong>of</strong> property portfolios (i.e.<br />
selling properties and using the<br />
proceeds <strong>to</strong> repay mortgages) <strong>to</strong> be the<br />
obvious solution for the worst hit<br />
landlords. However, the difficulties<br />
associated with this approach are <strong>of</strong>ten<br />
overlooked.<br />
Highly leveraged portfolios typically arise<br />
from regular refinancing, the cash from<br />
which is spent on growing the portfolio<br />
further.<br />
Where this has occurred over a number<br />
<strong>of</strong> years <strong>of</strong> ownership and capital growth,<br />
there may be insufficient equity – after<br />
lending has been repaid – <strong>to</strong> meet the<br />
costs associated with the disposal.<br />
We now consider an example <strong>of</strong> the<br />
implications <strong>of</strong> a sale <strong>of</strong> a highly<br />
leveraged property.
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