With government finances tight and the Chancellor prioritising a 2p national insurance tax cut, for the most part, the property market passed under the radar in today’s Budget. There were three exceptions, however.
1. Aligning holiday let tax treatment with buy-to-let
Ending the separate tax regime for furnished holiday lets (which includes full mortgage interest relief for higher-rate taxpayers and preferential Capital Gains tax rates) was recommended by the Office for Tax Simplification in November 2022. The report reflected on the 18% growth in the number of holiday lettings businesses owned by individuals and concern about long-term landlords moving homes into potentially more lucrative short-term lettings.
Our Freedom of Information Request to HMRC last year showed that around 40% of people receiving income from holiday homes, also received income from letting properties to long-term tenants. This suggests that in some areas of the country in particular, there is some crossover between the two markets.
However, it’s unlikely that partially removing mortgage interest rate relief for higher-rate taxpayers will be as damaging as it has been for long-term landlords. Holiday lets tend to be more lightly leveraged compared to long-term landlords, with more homes owned outright and those with debt, owing less thanks to lenders’ tighter stress testing.
Consequently, the change is likely to raise substantially less money for the Treasury than the removal of mortgage interest relief for landlords who are also higher-rate taxpayers. At current interest rates, the change is likely to raise in the region of £50m-£100m annually assuming no changes in behaviour, equating to around £1,000 per year in extra tax on the average mortgaged holiday let. This compares to a total of around £1.5bn rased by the introduction of Section 24 for longer-term landlords.
Rather, it’s likely that the withdrawal of the Business Asset Disposal relief will generate most of the revenue. Sellers face paying the same 18%-28% which is currently being handed over in tax by long-term landlords with homes in personal names, rather than the current 10%. This is likely to see the average capital gains tax bill before allowances almost triple, rising from £9,000 to £25,000.
Ultimately, creating parity between holiday let and long-term landlords is likely to continue driving the rush to incorporation among both current and prospective holiday let owners. Long-term landlords who had been considering the prospect of holiday lettings may also consider incorporation rather than a switch into holiday lettings.
2. A reduction in capital gains tax rates
Capital Gains tax is paid on the sale of second homes (including rented property) held in personal names. Lower-rate taxpayers pay a rate of 18% on the uplift in value after their £12,300 allowance (which is progressively being cut to £3,000) and costs have been accounted for. While higher-rate taxpayers pay 28%. In today’s budget the Chancellor announced a reduction in the rate of Capital Gains Tax paid by higher-rate taxpayers from 28% to 24%. This is an attempt to stimulate the market and will come into effect from April 2024. We estimate this change will save the average higher-rate landlord selling up around £3,300 in Capital Gains Tax, with an average bill of £19,800. The reduction in their personal allowance will errode some, but not all, of this saving.
On its own, this change is unlikely to have a material impact on investor behaviour. But taken together with wider changes to landlord’s tax environment since 2016 alongside today’s reduction to the generosity of the holiday let tax regime, it will provide a heightened incentive for long-term landlords thinking about leaving the market.
3. Abolition of Multiple Dwellings Relief
For those purchasing two or more homes in the same transaction, Multiple Dwelling Relief (MDR) meant Stamp Duty was paid on the average transaction value rather than on each individual transaction. This served to reduce Stamp Duty bills. There were around 15,500 claims submitted for this relief during the last financial year, saving purchasers around £730m in Stamp Duty (against a total Stamp Duty tax take of £15.3bn).
With an average Stamp Duty saving of £47,000, the abolition of MDR in the budget is likely to have a material impact on a relatively small number of micro developers and investors, those purchasing homes to refurbish or let out. The Office for Budget Responsibility estimated that the abolition of Multiple Dwelling Relief combined with ending the preferential holiday let tax regime will raise £600m annually by the 2028/29 financial year, a figure which has the potential to come in materially higher if there are no big behavioural changes.
