The Chancellor’s Spring Budget 2024 contained some important announcements that will impact landlords significantly.
Now the dust has settled on Jeremy Hunt’s Budget of 6th March, landlord groups have given their views on how it will affect the sector.
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The main thrust relates to landlord tax changes in terms of Capital Gains Tax and furnished holiday lettings tax. Industry publication Landlord Zone has described it as a “bombshell Budget” that has made some unexpected changes to the sector.
Capital Gains Tax changes
The Chancellor announced that the higher Capital Gains Tax rate of 28% on residential properties is to be cut to 24% on property sales.
Currently, the CGT of 28% on second homes, buy-to-let and holiday lets means investors lose a sizeable chunk of their profits in taxes when they sell. The reduction to 24% on non-permanent residences means the owners will make more money if they do decide to sell.
Hunt believes that by setting the lower rate of tax, the Treasury will increase property transactions, boosting revenue for the government in terms of the volume of sales.
Capital Gains Tax is to remain at the same rate of 18% for basic rate taxpayers.
The government believes the reduction will encourage landlords who are considering selling their properties to take the plunge.
On the flip side, while this would free up more homes for buyers wishing to join the property ladder, it would mean fewer rental properties for tenants if it encourages an exodus from the sector.
Furnished holiday lettings tax
Hunt is going to scrap the tax advantages that make it more profitable for owners to let their furnished holiday lettings to visitors rather than longer-term residents.
The furnished holiday lettings tax regime has traditionally offered a system that benefits investors who provide landlord furniture and let out their property as a holiday home. This system will be scrapped in April 2025, because Hunt believes it reduces the number of long-term rental properties for tenants.
Currently, landlords using the furniture holiday lets legislation are permitted to deduct the costs of mortgage interest from their rental income. In the UK, some 127,000 properties are registered in this way.
Under the scheme, landlords providing holiday lets that include furniture packages in their properties can also deduct the expense of the fixtures and fittings from their income for tax purposes. Once this system is abolished, they will be prevented from making pension contributions with the relevant tax advantages.
Property investors will also no longer be able to pay the business rate of 10% when selling their property. They will revert to paying the full Capital Gains Tax instead. Hunt believes this will encourage landlords with short-term lets to offer longer term lettings instead, providing more properties for the rental market for tenants, rather than holiday makers.
Market implications
Analysts believe abolishing this tax will have the biggest impact on owners of HMO properties who are considering turning their portfolio into serviced accommodation to earn a higher return. It is likely to discourage landlords from making the transition, because it will no longer be worth their while financially.
Elizabeth Small, a tax partner at London law firm Forsters, says this may also result in a price drop for investors selling their portfolio of furnished holiday lets. She says removing the plant and machinery capital allowances previously agreed by HMRC from furniture, fixtures and equipment means the profits from their sale won’t count as earnings when assessed for pension purposes. This could mean the furnished holiday lets sector will become more of a buyers’ market.
However, Small says the good news for holiday home sellers is that the fall in CGT is likely to offset this loss. She is reserving judgement on whether this is enough to persuade property owners in the furnished holiday lets sector to move into long-term lets for tenants.
Multiple dwellings relief abolished
Currently, buyers of multiple residential properties can benefit from multiple dwellings relief. This means they pay Stamp Duty Land Tax based on the average price per property. Buyers can make substantial savings when a number of properties are bought in the same transaction, or through linked transactions, as a result.
The Chancellor said he had done this because the multiple dwellings relief was meant to support investment in the private rental sector. However, it failed to do so.
Lucian Cook, of London-based Savills real estate company, said the end of multiple dwellings relief was liable to discourage landlord investment and was unlikely to improve a shortage of rental properties.
Empty Property Relief changes
The Chancellor announced the “reset period” to receive Empty Property Relief would be extended from six to 13 weeks in April 2024.
Currently, a property must have been occupied for at least six weeks in any new period of three to six months before Empty Property Relief applies. Under the new rules, it must be occupied for 13 weeks in an effort to discourage landlords from the practice of repeatedly offering a property for short periods to claim further EPR.
Reaction from NRLA
National Residential Landlords’ Association chief executive Ben Beadle has accused the Chancellor of ignoring pleas to revitalise long-term investment in rented domestic properties.
Instead, Hunt has “tinkered at the margins” to achieve shorter-term gain, Beadle claims. He believes the reduction in Capital Gains Tax won’t make any “meaningful difference” to the supply of rental homes in the longer term.
Currently, an average of eleven tenants are applying for every private rental property and the waiting list for social housing has reached 1.3 million. There are 110,000 households living in temporary housing and the number of first-time buyers has decreased.
Beadle says the Budget hasn’t tackled the long-term housing issues and claims it’s a “missed opportunity” for the Chancellor.