How tax changes have affected property investors

For most investors, investing in a tax-efficient manner is a priority, and changes to taxation over recent years have had a significant impact on property investors.

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As of April 2020, changes to mortgage interest tax relief and the way in which capital gains tax is paid has seen buy-to-let investors in particular face growing costs - pushing the expense of being a landlord even higher.

And more changes could be in store, as Chancellor of the Exchequer, Rishi Sunak, is tipped to announce a further shake-up of capital gains tax in the autumn 2020 Budget after his open letter to the Office for Tax Simplification (OTS) in July. 

In the letter, Sunak asks that OTS ‘undertake a review of capital gains tax and aspects of the taxation of chargeable gains in relation to individuals and smaller businesses,’ with the aim of ensuring ‘the system is fit for purpose and makes the experience of those who interact with it as smooth as possible.’ 

But what changes have already been made, and how do they affect both buy-to-let and property-backed Innovative Finance ISA (ISA) investors?


Dwindling tax reliefs for buy-to-let investors

In April, the government’s process of tapering off mortgage interest tax relief - which has been underway since 2017 - came to an end. 

This means that landlords are no longer able to deduct buy-to-let mortgage expenses from rental income, and will instead receive a tax-credit based on 20% of mortgage interest payments.

The new system is particularly unfavourable for higher and additional-rate taxpayers, as the credit only refunds tax at the basic-rate (20%), while they were effectively receiving tax relief of 40% on mortgage payments under the old rules. 

Another significant change is the way in which capital gains tax is paid, as well as a reduction of the tax reliefs available. 

Before the beginning of the 2020/21 tax year, landlords were able to declare any capital gains tax liabilities - from the sale of an investment property at a profit - in their upcoming annual tax return, which potentially allowed them over a year to pay the bill. 

However, buy-to-let investors must now declare and pay any capital gains tax liabilities within 30 days of selling the property.

On top of this, letting relief - which meant landlords could benefit from up to £40,000 in capital gains tax relief when selling an investment property that was once their home - has been, effectively, scrapped. 

Now, in order to claim the relief, buy-to-let investors would need to be living in the property when they come to sell. 

These changes have considerably impacted the profitability of many landlords’ portfolios, and may have some considering other means of property investment.


The appeal of the property-backed IFISA

The property-backed IFISA is a hands-off method of accessing the popular, and potentially lucrative, asset of property. 

Unlike the expenses associated with buy-to-let - including the costs of a mortgage, stamp duty, landlord insurance, property maintenance and now increased tax bills - the property-backed IFISA can offer low minimum investment amounts, and often no ongoing management fees. 

For example, experienced investors can invest into the CARLTON Bonds IFISA for as little as £1,000, and they’ll never be charged a fee.

But the real appeal of a property-backed IFISA are the tax-free returns, thanks to the ISA tax wrapper that shields them from both income and capital gains tax. 

Read more:download Making the Most of Your ISA Allowance, our free guide

As well as this, the high potential returns offered by property-backed IFISAs - with the CARLTON Bonds IFISA targeting between 4.75% and 7.75% - is particularly attractive to investors, especially when compared to the current average UK property rental yield of just 5%. 

Among the notable changes to taxation, property investors have been affected by the implications of COVID-19 for much of 2020 to-date, with around 1,300 buy-to-let mortgage products scrapped due to the crisis. 

However, the housing market is beginning to tentatively bounce-back. House prices saw their highest monthly rise in more than 16 years in August, and enquiries about properties for sale hit a record high in the aftermath of Sunak’s stamp duty holiday announcement - which is good news for property-backed IFISA investors. 


Choosing where to invest

For experienced investors, property can be a valuable addition to a balanced portfolio. But with increased taxation on the more ‘traditional’ investment of buy-to-let - added to already high expenses and hands-on responsibilities - its popularity is declining. 

On the other hand, the tax-free property-backed IFISA - which is unaffected by the recent changes to tax - could offer investors access to the potentially high-yielding property market at a much lower price, both time-wise and cost-wise. 


Carlton Bonds Brochure

The CARLTON Bonds product is available exclusively to experienced investors who are classified as either sophisticated investors, high-net-worth individuals or professional investors and have the knowledge and experience to make their own investment decisions. Investments are high risk and illiquid, your capital is at risk and returns are not guaranteed. Bonds are not protected by the Financial Services Compensation Scheme (FSCS).