The tax implications of landlords selling their portfolios


Possible tax implications for landlords

Landlords with a portfolio of properties are being called upon by accountants to consider the tax implications of selling off those properties. The past few years have seen some significant tax changes to the private rental market, one of which is that landlords who have financed purchases through borrowing could find the amount of tax relief they can claim against their finance costs restricted.

The changes

Between April 2018 and 2020, there will be a reduction in relief, which at the end of that time will be replaced by a standard 20 percent tax credit. As of 2018, landlords can offset just 50 percent of their mortgage interest against their profits; in 2019 this will decrease to 25 percent and then be replaced entirely in 2020.

This move primarily affects private individual landlords who have a portfolio of properties, although some basic-rate taxpayers will have found themselves nudged into the higher-rate bracket.

Another law that has recently come into effect in England and Northern Ireland regards Stamp Duty Land Tax (SDLT). The purchase of additional residential properties is now subject to a surcharge rate of this tax, which makes the cost of increasing a portfolio higher. For example, a property costing £200,000 would previously have incurred a £1,500 charge in SDLT. This has increased to £7,500.

What landlords are doing to counter this

In order to deal with these extra charges, many landlords who have a portfolio are either increasing rents to ensure their profits remain stable or are looking to sell off properties. Of course, increasing rent may result in difficulty finding tenants and isn’t necessarily a long-term solution. After all, tax is payable on rental profits so this avenue could end up costing landlords more.

As an alternative, some landlords with property in London and other cities are choosing to sell these in order to buy elsewhere. When choosing to sell a property on a buy-to-let mortgage, however, it’s worth remembering that the sale could result in a Capital Gains Tax liability. If a property has been held for a long time, the Capital Gains could be a significant cost, thus reducing the profit made from the sale. From 2020, the CGT must be paid within 30 days of the property’s sale.

That said, expenses of a capital nature can be offset against the Capital Gains Tax when the property is sold. If a landlord has had to replace windows, for example, this can be offset, providing evidence of the purchase can be produced.

Seeking help

Whichever route is taken, landlords are being urged to seek assistance from a tax accountant or financial advisor before taking any action. Considerations when selling a property should include whether alternative investments will generate the same yield. Many landlords will prefer the Capital Gains Tax bill to being financially crippled by tax, but a plan is strongly advised in order to limit the financial implications of the new rules.

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