The impact of the low oil price on the North East economy is well publicised, with significant job losses having a noticeable impact on the demand for rental accommodation in Aberdeen. In order to ensure continued occupancy, landlords are having to take a significant reduction in income. 

An excess of supply in city centre properties means that tenants are able to shop around in the knowledge that landlords are willing to reduce rents rather than face the prospect of a property lying vacant.

According to the ASPC, the average price of a city centre property has dropped by more than 7% since the start of 2015 and the economic uncertainty caused by Brexit will no doubt add to the problem.

Local market conditions are having a noticeable impact upon landlords and that is unlikely to change in the short term. The return on their investment will likely be further diminished by the additional tax burden placed upon them by former Chancellor, and although they can’t do anything about the oil price they should ensure they are doing all they can to minimise their tax burden.

New Tax Measures

If the impact of market conditions were not bad enough in isolation, George Osbourne – prior to the cabinet reshuffle – introduced a number of new measures that will increase the tax burden on those holding property as an investment.

For those looking to enter the property investment market, or those expanding their existing portfolio, a 3% Land & Building Transaction Tax surcharge over and above normal LBTT rates has been introduced. This results in an investment property worth £250,000 costing an additional £7,500.

Starting from next year, mortgage interest relief will be restricted so that higher rate tax payers will only receive basic rate relief by 2020. This will have a significant impact on those with interest-only mortgages, as this is usually the largest annual cost.

The very generous wear-and-tear allowance has now been abolished so landlords who provide furnished accommodation will no longer be able to claim a deduction equivalent to 10% of the annual rent. From 2016/17 onwards landlords can only claim the actual cost of replacement furniture and fittings, which is almost always much lower than 10% of rental income.

Capital gains on residential property remains at the top rate of 28% but, from April 6, the top rate on other forms of investments such as listed shares was reduced to only 20% - the stated aim being to incentivise forms of investment other than residential property, in an attempt to free up some much needed housing for first time buyers. 

Married couples also need to review the ownership of property to correctly allocate income and gains, and to allow for efficient use of allowances and tax thresholds.

More so than ever before, landlords need to consider the use of a Limited Company for holding property investments. The restriction on mortgage interest costs as outlined above does not apply to limited companies and, from 2020, the corporation tax rate will reduce to 17%. The £5,000 tax free allowance for dividend income also allows for more efficient extraction of profit making the use of a company more attractive than ever before.

Those with significant property portfolios can also consider the transfer of their property business into a limited company, which can be undertaken as a tax free transaction. Such a move allows for better control of their income, and simplifies moving assets to future generations when the time comes.

As ever, those with significant wealth tied up in investment properties must consider the inheritance tax implications upon their death, whether the assets are held personally or via a company.

If you'd like to talk about property investment or any of the issues raised in the above article, please get in touch with your usual Johnston Carmichael contact or email me directly.