What does the autumn Budget 2018 mean for landlords and investors?
The property industry – and especially landlords – have, understandably, become somewhat nervous on Budget day. This is due to Budgets over the last few years delivering some harsh tax changes which have adversely impacted landlords’ business models.
And, although there were more tax changes in the October 18 Budget, they are only likely to affect a few landlords who let out their own home and sell the property post April 2020.
Overall though, the Budget delivered more good news than bad for landlords and should help to deliver good returns in the future, despite the tax increases and current ‘anti-letting and landlord’ sentiment.
More money for tenants
In an ideal world from a landlord’s perspective, rents need to grow in excess of inflation which, although this varies each year, is typically around 3% annually. That means your rental income needs to grow in excess of 3%. If it doesn’t, it means that potentially the money you earn is reducing, versus the cost of living.
This may not seem that much but if, for example, you charged £750 rent per month in 2013, for your rental income to buy the same amount of goods and services five years later, you would need to be charging £817.10, which is £67.10 more per month.
The government announced various measures which should help tenants have more money to cope with rent rises including:
- Rise in the personal allowance for lower rate tax payers from £11,850 to £12,500; tax payers won’t pay the higher rate until they earn over £50,000;
- An increase in the National Living Wage from £7.83 to £8.21;
- Increased financial support for those on Universal Credit.
Additional income for tenants means they will be more able to cope with rents increases you may need to put through to mitigate recent tax rises and inflationary increases.
More opportunities to generate investment returns
To make money from property, we require a healthy economy with more jobs and higher wages. According to the Budget, the government and independent forecaster The Office for Budget Responsibility (OBR) estimate that both will improve for the next five years. Economic growth is forecast to rise from 1.4% in 2020 through to 1.6% in 2023, while wages are expected to grow in excess of inflation, i.e. real growth over the next five years.
Secondly, the government plans to continue to invest more money in infrastructure, which means better communications from Cross Rail through to HS2 and the investment in the Cambridge-Milton-Keynes Corridor. Whether the investment is large or small, at a local level these kind of changes can help improve property capital growth, rental income and mean demand remains higher than supply, all of which can boost returns.
Thirdly, additional investment to help support the local high street includes allowing local authorities to draw up plans to help turn “underused retail and commercial areas” into housing. This may mean the opportunity to find commercial premises which can be bought at favourable prices and turned into homes for people to rent, helping to generate new, easy-to-maintain rental properties which can deliver healthy capital growth and yields.
Changes to Private Residence Relief
This relief is available to those who let a home that was once lived in as a main residence.
Currently, you can claim relief on the Capital Gains Tax you pay based on the length of time you lived in the property and the last 18 months you owned the home.
However the new proposals (effective from April 2020) will mean only those who let to live-in tenants will be able to claim the relief, which in itself will be reduced from 18 months to nine months. Although for those who are disabled or in a care home, there won’t be a change to the 36-month final exemption period.
To find out if this impacts your tax bill on sale, it would be wise to speak to a specialist property tax adviser.
Overall the Budget was a positive one from an economic, wage and infrastructure investment perspective. Of course, this is all subject to a smooth Brexit, so it’s important to keep up to date with changes over the next few months to be sure about the likely economic future and its impact on the property market.
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