Watershed 2010 budget effects the landlord investor market

The recent Budget under the new coalition government was always going to be a watershed moment. Firstly, for the new coalition government satisfying the disparate needs from the left to the right of the political spectrum and secondly it will be a landmark for this country economically. The UK economy is largely financially based and the property market is a key driver in the economy. It was with bated breath that the announcement to the investor market with regard to second properties was anticipated.

History of Capital Gains Tax

It is worth understanding the context of Capital Gains Tax or CGT on second properties to see why it was initially introduced.

CGT was introduced in the 1960’s by James Callaghan. CGT has always been the same or below the income tax rate. However, it was not until the last Labour government decided to abolish indexation in 1998 that taper relief was introduced on second properties. Indexation was a method of incorporating inflation rises in the property market.

However, after 1998 when taper relief was introduced, along with the incumbent second property mortgage products, did the second property investor boom take off. This was because taper relief allowed exemptions to be built up over a period of time until a property was kept for such an extent that it became zero and the profits made on that property were not taxable. Clearly in a rising market, property was seen as a “safe bet” and a tax free one.

What is happening today?

In the past the taper relief system was a tax system that encouraged property retention then disposal. However, now that indexation and taper relief have both gone those that have a property are likely to hold on to them and investment property is likely to remain an indefinate retention proposition. In the current economic climate property investment is still a safe bet and letting provides a second income as well as the benefit of capital appreciation albeit not as attractive as before.

So as it stands today the CGT rate on second properties has been moved from 18% to 28%. Given that the CGT rate at 28% is probably good news, bearing in mind the state of the economy and what could have happened tax wise. The likelihood is that seasoned investors in the property market are more likely to be higher rate taxpayers so a 50% rate was a possibility.

It will be interesting to see what the future holds but suffice to say that given the increase in the CGT rate, investors will be holding on to properties for longer and renting them out as all that remains now is the personal allowance at £10,100 before tax kicks in; hardly an incentive to sell!

There are many benefits to letting your property through a property management company. However, if you, as an investor, were to have 2, 3 or more investment properties it is worth considering managing them yourself as the time and effort to look after one is not dissimilar to the time and effort to look after four or even five.

Here at Oyez we provide solutions for property rentals. From all the major forms that you need through to the repossession documents. Oyez now have a guidance DVD explaining how to complete the relevant forms and what to look out for. The DVD can be purchased from FormsLink.

I have already talked about tax but given the difficulty in obtaining suitable mortgages, individuals and families that would have bought a property may now be forced to rent until the mortgage market becomes available to them.

Outlined Budget Changes

There are some other interesting points that have arisen out of the Budget worthy of note:

• From 2013-14 local housing rates will be uprated in line with the Consumer Price Index
• From April 2011, Housing Benefit claimants with a disability and a non-resident carer will be entitled to funding for an extra bedroom.
• Housing Benefit awards will be reduced to 90% of the initial award after 12 months for claimants receiving Jobseekers Allowance. This will be introduced in April 2013.
• From April 2011, Local Housing Allowance Rates will be capped at £250 per week for a one bedroom property, £290 per week for a two bedroom property, £340 per week for a three bedroom property and £400 per week for four bedrooms or more.
• The Government contribution to Discretionary Housing Payments will be increased by £10 million in 2011-12 and £40 million in each year from 2012-13.
• From April 2013, housing entitlements for working-age people in the social sector will reflect family size.
• From October 2011 the local housing allowance rates will be set at 30% of local rents

Assured Shorthold Tenancies (AST)

The increase in rentals and the retention in the housing sector in retaining second properties for a longer time all imply renting is to be encouraged albeit in these tough economic times.

As for rentals, please be aware that there are planned changes from 1st October 2010 as the threshold for rents will increase from the current limit of £25,000 to £100,000 per annum. This will apply retrospectively and those tenancies of £100,000 or less will become AST by default (providing no other relevant exemption applies). So luxury properties and large shared houses under one agreement will be caught.

Landlords have to be aware that tenancy deposits need to be protected and there is a route to eviction under section 8 and section 21. Possession rules still apply. Landlords could easily fall foul of these provisions under the Housing Act 2004 leaving Landlords open to a claim by a tenant or tenants for failing to register the deposit! It will be interesting to see if tenants exercise this right! Oyez has all of these forms and the DVD to explain them. The DVD can be purchased from FormsLink.

Conclusion

All that is needed is an eye for a property, a competent lawyer and the rental clientele. Everything else is in place for this secondary income to become a primary full time job where investors can self manage and self determine the state of the properties. There is also the ability to retain properties for longer and to dispose of them if and when necessary. I talk about this in my book which can also be found on the FormsLink website

Mark Periklis
E-Zine editor
OyezStore
July 12th, 2010
www.markandcolawyers.co.uk