During the last decade, the UK property industry has seen an increasing number of tax rules and legal obligations place on investors and landlords, including changes to the wear and tear rules, lettings relief and mortgage interest relief.
This has forced many landlords out of the industry and resulted in many seeing their incomes shrink over time.
Add to this the challenges of the pandemic, which has led to a build-up of rent arrears, and it is clear to see the immense pressure the industry has faced.
Most landlords will be hoping for a more secure and stable future, but there are already rumblings that the Government may be introducing further red tape to the sector in the year to come.
At the moment, around 40 cross-party MPs are calling on Boris Johnson and his Government to table new legislation that would prevent UK property from being used for economic crime.
Among those calling for change are 17 Tory backbenchers, who want the prime minister to bring forward draft legislation first proposed in 2018 to introduce a register of overseas entities that own UK property.
It is well-known that property, particularly in London, has been used by overseas criminals to launder money and legitimise their gains.
If it goes ahead, this legislation will likely create a new obligation for landlords to confirm that they are not overseas investors and prove that their property investments are not linked to economic crime.
Although there are already rules that tax overseas property investors that are non-resident in the UK, there continues to be additional pressure for the Government to do more.
According to data from Hamptons, more than half of property purchases in prime London are by overseas investors, and only 30 per cent of these buyers are residents, for tax purposes, in the UK.
The Pandora Papers, which exposed offshore tax arrangements earlier this year, included a significant quantity of property deals that used overseas trusts to reduce the tax paid, with the former Prime Minister Tony Blair even mentioned in one transaction.
Could a crackdown on overseas property investment be on the cards? At the moment, the Government hasn’t given any recent indication that it intends to significantly change the tax rules around foreign property ownership, but it is something that could be a target in a future Budget.
Capital Gains reform
Capital Gains Tax is regularly brought up before each Budget as a potential target for raising taxes, particularly how they apply to property.
Under the current rules, only gains on second homes are within the scope of this legislation thanks to Private Residence Relief.
However, this month the Resolution Foundation said the Government should consider applying Capital Gains Tax (CGT) to increases in the value of main residences as well.
The thinktank said that with house prices rising by 86 per cent more than inflation in the past two decades, a change to the rules could help to raise £3 trillion for the country.
They said that the gains had been “unearned, unequal and untaxed” and pointed out that the benefits of the property boom had been disproportionately enjoyed by wealthier, older people and those living in London.
The Government has not responded to the proposal, but could this be the way that property tax heads in future? With a big budget deficit, a ‘wealth on tax’ would be one way for the Government to resolve the nation’s debts.
With many different proposals on the table and the challenges of the pandemic, property investors face an uncertain time.
For them, the best way to manage their finances and portfolio most efficiently is to seek professional advice.
To prepare your investments for future tax and legislative changes, please get in touch.