As buy to let (BTL) landlords see many of their tax perks disappear, what does the future hold for the sector? Will serviced accommodation providers be next in line for a hike? Here’s some crystal ball gazing from Manish Shah, Co-founder of CopoFi…

One thing’s become clear over the last couple of years: if you happen to be a cash-strapped Chancellor of the Exchequer, a residential landlord offers a very tempting target.

By way of recap, we’ve already seen the introduction of the 3% second property stamp duty surcharge, the ditching of the 10% ‘wear and tear’ allowance — and most significant of all, the tapering of mortgage interest rate relief. Taken together, the anti-landlord tone of these measures is hard to ignore.

It’s hardly surprising that so many landlords have shifted to the short-term holiday let market as a way of bypassing the BTL tax clampdown. And if you are looking seriously at the serviced accommodation (SA) model for the first time (especially holiday lets), you’re certainly not alone.

But what happens if those perks that are currently enjoyed by SA landlords were to suddenly disappear? I wanted to share my views on what might bearound the corner, taxwise. Here are my personal thoughts on where we might be headed (N.B. this is definitely not ‘financial advice’ — and for that you’ll need to speak to a specialist advisor!). So here are my ideas — and with a bit of luck, they will encourage you to take a long-term look at your own portfolio…

Getting inside the Chancellor’s head: a tale of two landlords…

The raft of changes to the tax regime that are just starting to kick in all stem back to George Osborne’s tenure at the Treasury. So what was he trying to do? I think he had two types of BTL landlords in mind…

Traditional BTL landlords

Most governments like to present themselves as pro-business. And in this regard, the current government has been willing to put its money where its mouth is (see the recent cuts to the Corporation Tax rate, for instance).

But what constitutes a business? here’s the thing about the traditional BTL model: I don’t think George Osborne saw it as a “proper business”. There’s no 9–5 or hard graft involved; save for the need to find new tenants every couple of years or so, you simply kick back and collect your rent. In the eyes of the taxman, this should be seen as an investment.

And of course, in the eyes of the public and politicians alike, there are good investments and bad investments (N.B. we’re not talking about returns here — but about the perceived benefits of these investment models to society as a whole).

The popular spin was that BTL belongs in the “bad” camp. Snatching tax perks away from BTL landlords is an easy way to try and show you are doing something about the nation’s housing problems (and it’s certainly a lot easier than actually building more houses).

For the chancellor, it was an easy win to start removing mortgage interest as a cost input for personal tax returns purposes. He was honing in on an allegedly unpopular group of investors — without being seen to attack “proper businesses”.

As a side issue, he did however leave BTL landlords with the ability to fully offset mortgage costs were the property is held within an SPV structure. That said, it wouldn’t take much effort for the current chancellor to review the SIC codes and remove this SPV exception.

The “B&B” landlord

Here, we’re talking about the traditional B&B owner with cottages in the likes of Cornwall, South Wales, Lake District etc. Now arguably this is a heavy lifting business model. Checking in guests, providing breakfast, cleaning up: we’re talking a 24/7 job.

Tourism is good news; if George Osborne was seen to adversely impact the livelihoods of the 100s of thousands of people whose FULL TIME job was basically running a mini hotel, we’re in political stink territory.

This explains the “Section 24” exemptions. Where a landlord’s property meets the criteria of a Furnished Holiday Let (FHL), that landlord effectively continues to get the full benefit of interest rate relief; a benefit that traditional BTL landlords are losing. For a closer look at what it takes to qualify, have a read of these official criteria.

So in other words, in the eyes of policymakers at least, it seems that FHL landlords deserve to continue to enjoy the benefit of interest relief, whereas traditional landlords do not.

FHL: make hay while the sun shines…

Landlords are always going to tweak their business model to ensure profitability. And increasingly, that means switching over to the likes of Airbnb.

In London alone, there are 60k plus Airbnb live listings. The Residential Landlords Association (RLA) found that in the year to March 2017 there was a 75% increase in the number of multi-listings (where individuals list more than one property on the platform). Over in Cardiff, as many as one in five homes to rent are now being offered through holiday websites.

The RLA also discovered that of those new landlords who had switched over to short-term lets, over a third had done so as a direct consequence of the reduction of tax relief on mortgage interest.

Airbnb is undoubtedly good news for landlords; less so perhaps for the Treasury! For a start, with thousands of property owners switching to Airbnb in direct response to the tapering of mortgage interest relief, it means less revenue than expected is generated. And what about missing VAT receipts? Likewise, you’re hardly tackling the housing supply problem if thousands of landlords are switching from traditional resi to dabble in the holiday market!

Here’s how Airbnb in London grew between 2014 and 2016 as compared to the traditional hospitality sector…

Urban housing supply problems have been a bug bear with politicians for as long as I can remember. Airbnb is actually pretty easy to attack as part of the supply problem.

So how do you go about targeting Airbnb if you’re the chancellor? Do you find a neat structure whereby they protect the old traditional bnb industry, but urban city centres are not allowed all the taxation benefits? Do you ask for a paid permit structure from SA Landlords? London has been segmented by a 90 day planning rule, so why not segment further for taxation? Ask yourself if you or your friends doubted Airbnb policing London over a year ago. (The answer’s probably yes!).

Not possible? Too difficult, I hear you say? The rent a room scheme is currently under review (https://news.rla.org.uk/budget-promises-rent-a-room-review) and it looks as if that particular taxation benefit for primary home owners is disappearing. You have seen Airbnb cut deals with other countries/cities and they now collect tax receipts on behalf of them. Are you naïve enough to believe that the UK government won’t do something in the future with Airbnb and booking.com? After all they have already asked Airbnb to police London for them. Might the Treasury ask Airbnb to provide the info needed to cross check against your HMRC tax filing?

To me, a property planning win might involve loading some of the income into your pension (depending on your circumstance looking at inheritance planning, with roll over relief to sons/daughters etc).

Let’s holistically look at the UK property market and again go into the politician’s head by looking at the social impact of the current working model…

1) Residential — I have a family and I own my own house which has a mortgage on it. I pay 5k of interest costs a year and I earn 20k from my job. Does that mean that I actually earned 15k a year and should only pay taxes on an income of 15k? There is, of course no current provision for a homeowner to no offset of interest costs.

2) BTL — I am BTL landlord and yet I am able to offset interest (at least until such time as the tapering out of interest relief is complete)… and yet, BTL landlords aren’t exactly flavour of the month!

I know this will be very controversial to this audience, but the societal solution to this might actually be to have the interest rate relief apply to a primary residence property and not to secondary properties (admittedly, you’d need a very long phase in period) for it.

My personal view is that we will see some of these changes in years to come. So at the minute, especially with FHL and Airbnb, it’s a matter of making hay while the sun shines — of maximising the tax advantages currently offered by this model. But don’t think of these advantages necessarily as a permanent feature. If something becomes successful, the government will want its pound of flesh at some point.