Scottish landlords facing higher tax bills than their English counterparts from next week

French Duncan



Scottish landlords of private rented properties face higher tax bills than their English counterparts from next week according to leading accountants and business advisors French Duncan LLP. This is because of the reduction of tax benefits introduced by George Osbornes’ 2015 Budget which aimed to discourage buy-to-let (BTL) investment and Scottish landlords are hit harder due to the higher rates of tax in Scotland. Despite these changes, and a few others which have been introduced since, many landlords are unaware just how significant these changes are and the impact they are having on their tax liabilities and the viability of many BTL investments.

Stephen Oates, tax director with French Duncan, explained: “From next month three quarters of any interest paid on buy-to-let borrowing will be eligible for a 20% tax credit with the balance of interest deductible from rental income. While this sounds complicated the effect is alarming on the profitability of BTL investment and Scottish landlords face a 15% greater reduction in net income by next year than their counterparts in England and Wales.”

“For example, a higher rate taxpayer in Scotland with a rental income of £12,000 and interest on a BTL mortgage of £8,000 will find their net income down to £1,100 (£100 less than south of the Border) for the 2019/20 tax year, less than half the level it was in 2016/17. From the 2020/21 tax year it will be down again to just £680 which is 15% lower than a landlord in England and is 28.8% less than the net income four years earlier. Because of this many will begin to question the value of their property investment.”

“Given that many private landlords became landlords because of personal circumstances i.e. they inherited property, or they were unable to sell their property and decided to rent it out until the market picked up these tax changes could come as something of a surprise.”. ‘Amateur’ landlords are estimated to account for 60% of all landlords and are now faced with an array of financial and regulatory changes which have turned what was once a lucrative hobby into an administrative nightmare which may end up costing them money.”

Stephen continued: “Potentially, the financial situation could be even worse than our table suggests if, for example, the disappearance of the deduction for interest increases the investor’s gross income to the point that it trips over the £100,000 threshold, at which the personal allowance is phased out. Interest relief changes and poor short-term prospects for capital growth could result in sales by BTL investors picking up this year. There is another tax incentive to sell on the horizon, too - from April 2020, capital gains tax on residential property (at 18% and/or 28%) will have to be paid within 30 days of sale, whereas the current rules effectively give a minimum of nearly ten months’ grace.

“There is no doubt that the aim of successive chancellors since George Osborne has been to make it more expensive for landlords to buy a property, more expensive to borrow and run a rented property, and more costly when the investment is sold. The result is that the whole process of being a landlord has become more complex, costlier, and less attractive for all but professionals and large-scale investors.”

Stephen concluded: “Changes to taxation, to borrowing costs, to land and buildings transaction tax, and to tax relief on selling properties means that for many landlords what was once a relatively simple, and profitable, process has become a nightmare. The result of all this change is that many landlords have been exiting the market. Whilst that may be the correct move for some, they need to ensure they exit as tax efficiently as possible. For others the option to remain a landlord can be worth it, but they need to ensure they have the right tax and financial setup.”

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