How 2021 Rishi Sunak budget changes affects UK landlords

simon

Simon Misiewicz

3rd March 2021

Rishi Sunak 2021 budget changes

Rishi Sunak delivered the budget on Wednesday 3rd March 2021

Several tax changes affect business owners and property investors (UK landlords). Several changes will affect

– Income Tax
– Corporation tax
– Capital Gains Tax (CGT)
– Inheritance Tax
– National Insurance Contributions
– Stamp Duty Land Tax holiday period

Rishi Sunak, on behalf of the government, will discuss how the tax changes will benefit the UK economy.

Rishi Sunak has supported the UK economy in 2020 and part of 2021 with the Furlough Scheme, where employers could place the responsibility of employee salary payments onto the government. Also, Rishi Sunak supported the self-employed who had an income impairment due to the Coronvarivus pandemic (COVID19) knowns as the Self Employment Income Support Scheme, which is also known as the SEISS.

Rishi Sunak also gave a lot of financial support to other businesses within the hospitality industry, such as pubs, clubs, restaurants and hotel industries.

All of this financial support that Rishi Sunak has provided to the UK needs to be paid back in the form of taxes.

The level of debts in the UK has significantly increased over time.

financial year¹
ending March²
20132014201520162017201820192020
Debt³1,424.21,520.91,602.61,650.91,719.61,763.41,820.91,876.8
as % GDP82.684.285.585.285.384.784.184.6

General government gross debt was £1,876.8 billion at the end of the financial year ending (FYE) 2020, equivalent to 84.6% of gross domestic product (GDP) and 24.6 percentage points above the reference value of 60.0% set out in the protocol on the excessive deficit procedure

It is believed that the UK now has a budget deficit of £2 trillion

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Rishi Sunak business support plan - three phases

Rishi Sunalk spoke about the support that is now required due to the Coronavirus pandemic.

The Furlough scheme will now be extended to September 2021. This means that the government will pay the majority of the salary directly to the employee. Employers will still be expected to pay national insurance and pension contributions.

Rishi Sunak has prioritised the focus of employment and to protect UK jobs.

There have been a lot of support to employers, self-employed and people that wish to buy homes. A number of tax cuts were introduced during the Coronavirus pandemic. Some of these changes will remain in place until September 2021.

2021 Budget changes - Income tax rates

Income tax is charged on your earnings that you receive each year. Each UK resident receives a personal allowance of £12,570 per annum. This is an increase of £70 from the 2020/21 personal allowance.

A personal allowance means that you do not pay any income tax on this amount.

Basic rate taxpayers are people that have earnings of more than £12,570 personal allowance up to £50,270. This means that a basic rate taxpayer could pay 20% income tax on their £37,710 earnings.

High rate taxpayers are those that have an annual income of more than £50,271 to £150,000. This means that people will pay 40% income tax rate on earnings up to £99,720

Additional rate taxpayers are those that have an income of over £150,000. People that have earnings over £150,000 have an income tax liability of 45%.

There are other tax-free allowances on £5,000 savings allowances. There is also a tax-free allowance of £1,000 on any interest income received. People that own shares also benefit from a £2,000 tax-free dividend allowance.

Income tax and property investors

Albeit the above lays out the income tax elements, but we need to be mindful that UK landlords that hold residential properties in their own name are treated very differently. This is because of the tax law that relates to Section 24 mortgage interest relief cap.

Income tax is charged on the profits made on a residential property portfolio held in the personal name of a landlord. However, Section 24, requires landlords to remove the mortgage interest costs. This means that UK landlords will report a greater taxable profit than the actual profit made.

There is a 20% income tax relief on the mortgage interest costs that have been incurred.

We have seen many UK landlords now pay more tax to HMRC than the profits made on their residential property portfolio.

2021 Budget changes - Corporation tax rates on limited companies

Rishi Sunak confirmed that there will be no corporation tax changes in 2021/22.

Business owners that own a limited company will pay corporation tax on the profits made. The corporation tax rate is 19%. Many people use a limited company as they do not need to pay Class 2 or Class 4 national insurance that business owners would need to pay under self-assessment.

The corporation tax rate is lower than the basic rate income tax band rate of 20%.

There are many ways that business owners and landlords may take money out of their limited company. Setting up a tax-efficient company is key to tax mitigation. This is especially the case for business owners and property investors that work with joint venture partners.

Corporation tax will remain unchanged until April 2023. Upon April 2023 corporation tax will increase from 19% to 25%. However, this increase of corporation tax will only come into effect for limited companies that make more than £50,000 profits. Any limited companies that exceed £50,000 profit will have a taper relief. This means they will pay between 19% and 25% of the profits up to £250,000.

Rishi Sunak suggested that 70% of limited companies will not be affected by the 2021 budget changes. Rishi Sunak also said on 3rd March that only 10% of limited companies will pay the 25% corporation tax rate.

Limited companies will also be able to carry back losses three years.

2021 Budget changes - Capital Gains Tax

Rishi Sunak confirmed that there will be no Capital Gains Tax changes in 2021/22.

Capital Gains Tax also known as CGT is a tax applied to people selling assets. In this section, we will focus on business owners and property investors.

We wrote a separate article on how Rishi Sunak requested the Office of Tax Simplification (OTS) to review CGT and whether or not they should be aligned to income tax rates

There is a tax-free allowance known as Annual Capital Gains Tax Exemption. Each person in the UK is allowed £12,300 when they sell an asset before they have to pay Capital Gains Tax. This means that a couple selling assets will enjoy a combined annual capital gains tax exemption of £24,600.

There are many ways in which UK landlords may be able to mitigate Capital Gains Tax. People that do not live in the UK will still be subject to CGT also known as Non-resident Capital Gains Tax.

Business owners need to take advice from their accountants and tax specialists. The reason why business owners need to take advice is because of Entrepreneurs Relief. This is a relief that will benefit business owners that sell a trade business. Disposals of a business valued up to £1,000,000 will be taxed at a 10% rate and not 20% for high rate taxpayers.

People that sell a home will also benefit from a tax relief known as Private Residence Relief (PRR). Homeowners that sell their home will not have to pay Capital Gains Tax for the time that they have lived in the property.

It may be time for landlords to incorporate their property portfolios into a limited company. Property investors that prove they are in business will benefit from incorporation relief, meaning that no CGT needs to be paid by moving their properties into a limited company.

2021 Budget changes - Inheritance Tax

Rishi Sunak confirmed that there will be no Inheritance Tax changes in 2021/22.

Inheritance Tax is a death tax. When you pass away you will pay an Inheritance tax of 40% above the IHT threshold, which is £325,000 per person. The IHT lifetime allowance of £325,000 may be increased to £500,000 based on their home value.

There are many ways in which both business owners and landlords may mitigate Inheritance Tax.

2021 Budget changes - National Insurance rates

National insurance affects people that are

– Employees
– Employers
– Self-employed that are taxed under self-assessment

Employees pay 12% national insurance on earnings above £9,568 to £50,270. Employees with a salary of more than £50,271 have to pay national insurance of 2% on the excess.

Employers that employee people also have to pay national insurance. Employers have to pay 13.8% national insurance whereby employees are paid a salary of £8,841 or more.

Sole traders that submit a personal self-assessment also pay national insurance. The amount of national insurance contributions that a business owner pay Class 2 national insurance equates to £3.05 per week where their profits exceed £6,515 per annum.

In addition business owners under self-assessment pay Class 4 national insurance. The amount of Class 4 national insurance is 9% on profits made between £9,568 and £50,270. Furthermore, business owners also have to pay 2% Class 4 national insurance on profits in excess of £50,271.

2021 Budget changes - Stamp Duty Land Tax holiday period

As we discussed in a property article that Rishi Sunak provided the Stamp Duty Land Tax holiday period, which meant that people buying a residential property would not have to pay SDLT on purchased up to £500,000.

The holiday period applies to both individuals such as landlords and directors that buy residential properties inside of a limited company.

Rishi Sunak announced that the Stamp Duty Land Tax holiday period will be extended until 30th June 2021. This means that people looking to purchase a home or a residential property investment will pay 0% SDLT on purchases up to £500,000.

The Stamp Duty and Tax holiday period will be extended further until September 2021 with a 0% tax rate on homes purchased up to £250,000.

From October 2021 the Stamp Duty Land Tax holiday period will end. People buying properties after this time will once more pay SDLT on properties with a greater value of £125,000

Please note that people that already own residential property will have to pay the 3% Stamp Duty Land Tax additional rate. The 3% SDLT higher rate also applies to landlords that buy properties within a limited company irrespective of how many properties that the company owns.

2021 Budget changes - Furlough extended to September 2021

During the Coronavirus pandemic, employers were able to place employees on Furlough. This means that the government paid the majority of the staff wages up to 80% or £2,500 cap (whichever was the lower amount). The Coronavirus Job Retention Scheme (CRJS) was due to end in April 2021.

Rishi Sunak announced on 3rd March in the budget that the Furlough Scheme will be in place until September 2021.

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