Morfitt's Mailshot Issue 48...          Can't see this email properly? View in browser

Morfitt & Turnbull

Issue 48   

Landlords Feel the Squeeze
There has been an increase in capital gains tax receipts which indicates that landlords are possibly selling up as regulatory and tax changes start to bite in the buy-to-let market.

Latest figures from HM Revenue and Customs revealed there was an 18% increase in capital gains tax receipts in 2018-19 compared to the previous year with the amount raised reaching £9.2bn.
According to industry experts, this has been driven in part by private landlords ‘offloading’ less profitable buy-to-let properties as landlords’ margins narrow.

Unlike when a homeowner sells their house or flat, private landlords are charged capital gains tax on any profitable gains they make, so an exodus of private landlords from the market could lead to increased revenue for the Exchequer.

The trend is a sign that landlords have started to feel the effect of tax and regulatory changes on their income, as had been predicted by the Intermediary Mortgage Lenders Association in January.

IMLA warned this year's tax return would be the first time many landlords would see the effects of the changes on their earnings.
Landlords have been subject to a number of regulatory changes in recent years, with an introduction of an additional 3% stamp duty surcharge on second homes in April 2016 followed by cuts to mortgage interest tax relief.

Buy-to-let borrowers are also now subject to more stringent affordability testing under the Prudential Regulation Authority's tightened underwriting rules.

Capital gains tax is a growing source of revenue for the government. Last year’s record haul of £9.2bn already looks like it could be surpassed in the current year.

Research from Arla Propertymark also showed the number of buy-to-let properties up for sale had increased by 25% in April.
Landlords are now being squeezed from two sides by the taxman. From one side, the higher rate tax relief on mortgage interest is gradually being phased out, which makes it a much less profitable exercise. From the other, those looking to sell buy-to-let properties are being squeezed with an extra 8% capital gains tax.

Currently, the tax is due by January 31 following the end of the tax year in which the sale has occurred but the government plans to change the rules from April 2020 to require tax to be paid within 30 days of the sale.
  Property portfolio
The government is also cracking down on overseas landlords avoiding tax and new research shows letters and campaigns have led to a 61% increase in those admitting to not paying tax on their rental income.

In a further knock to landlords, the government has proposed abolishing the so-called ‘no fault’ Section 21 notices which give landlords the power to evict tenants at the end of their tenancy without a reason.

At the time, the National Landlords Association warned that any greater security for tenants would mean little if the homes to rent where not there in the first place.

Chris Norris, director of policy and practice at the NLA, said although an exodus of private landlords from the market could represent a windfall of sorts for the exchequer, he thought private property contributed far more to the UK economy when it was actively let than when it was disposed of as an asset.
He said: "Landlords’ taxable income from rent is generally taxed every year at 20 or 40% depending on their income, whereas taxable gains are likely to attract only 18 or 28% and are a one-off charge.

"In many cases, after an individual’s annual tax-free allowance, capital costs, and other deductibles are taken into account, it is likely that the tax raised by a typical property sale would be equivalent to only a year or two’s income tax.
"It would be far better for the government’s tax take to encourage landlords to keep trading, rather than sell up."

So it looks like interesting times ahead for any property landlords!



Adam's Technical...  Third Party Pension Contributions
A pension contribution can be made by a UK resident individual personally or one can be made on their behalf.

A pension can be started by a third party for anyone, even children or grandchildren under the age of 18. Under current Inheritance Tax rules the amount being ‘gifted’ by way of a pension contribution is excluded from the donor’s estate for the Inheritance Tax calculation seven years after the contribution.
When a contribution is made by an individual or third party into a personal pension plan a ‘bonus’ of 25% (the basic rate tax relief) is added to the amount. This bonus is claimed by the product provider from HMRC when the contribution is made. This additional amount cannot be claimed once the individual is 75 years old.

All UK resident individuals are allowed to contribute or have a contribution made on their behalf of £2,880 each tax year. The additional £720 (25% of the £2,880) is then claimed from HMRC, resulting in a gross contribution of £3,600.
If a third party wants to make a pension contribution over £2,880 net / £3,600 gross the individual the contribution is being made on behalf of needs to have pensionable earnings in the tax year equal to or higher than the gross contribution. Please note that pension rules may limit the amount of the contribution.

You should also note that under current rules monies cannot be withdrawn from a pension plan prior to age 55. This minimum age limit is likely to increase in the future.

Please contact your usual M & T adviser if you wish to discuss.

Gareth Says... 

What happened to ‘Woodford’?

Well, it’s quite a complicated story really. He left Invesco Perpetual to set up his own company with a ‘blaze’ of headlines in 2014 and quickly became the best known name to the public at large. He was always very well known to the ‘industry’.
    Neil Woodford
He said his strategy would be identical to the way he ran the funds when at Invesco. We therefore followed him. For the first 18 months all went well and he continued to outperform his ‘peers’. His performance has always been cyclical and in 2016 it began to fall relative to the competition and in 2017 we began to suggest clients move away, purely down to under performance.
Woodford has always backed smaller companies especially many in the pharmaceutical sector. It would appear that he backed a lot more in his new venture than his old one, especially Private Companies.

Then clients started to leave in droves in 2019 and he needed liquidity, but he couldn’t sell the Private Companies and didn’t wish to sell other holdings, so his performance suffered and even more people wanted to leave – hence implosion.
I believe he is trying to ‘buy’ some time to create substantial liquidity and hopefully start to perform again, so that when he does re-open the fund, (latest news says December, but don’t be surprised if this is pushed back) everyone doesn’t jump ship!

For the record M & T didn’t see the fallout that has transpired, when we suggested switching, it was purely down to relative performance – i.e. we do not possess a crystal ball!

In conclusion, the writer feels personal ego got in the way of sound judgement. I think the Regulator will overreact and stop funds investing in Private Companies, or severely limit it.

Will Woodford survive?

That is on a knife edge with arguments for and against – I suggest it will be down to his performance, as if he can recover his ‘touch’ many clients will stay with him. Will he ever get back to his former status? Probably not!

Staff Matters - Boxing Clever
Our very own Lisa completed her 8 hour Boxathon challenge in July to raise funds for a very worthy local charity. She said that it was a very tough day but would she do it again? Of course!

Well done Lisa!

Ps. Please note this isn't a picture of Lisa. We just liked it so much we thought we'd use it!
    Boxing clever


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