Its fair to say that apprehension has been high in the run up to the Budget this year. Both anecdotally, we noticed a drop in enquiries across October, and statistically, where Zoopla and other portals confirmed that transaction volumes were down in the months preceding the budget. Its clear that mortgage clients and home buyers have been waiting to see what the effect will be. In this brief post i want to highlight some of the details of the announcement and what it means for Buy to Let investors and their tax rates.
The changes in detail
There are a great number of articles that summarise the additional 2% on property tax announcement from the November budget but very few highlight the exact details and what this will mean.
Broadly speaking changes are as follows:
Property will now have its own tax banding, outlined as follows:
- Basic rate (taxable income of £12,571 to £50,270) – 22% – Effective 10% increase
- Higher rate (taxable income of £50,271 to £125,140) – 42% – Effective 5% increase
- Additional rate (taxable income of over £125140) – 47% – Effective 4.4% increase
Importantly however, because tax is applied on the gross rental income and then a relief is applied its important to note that the relief amount has also increased to 22%
The order of how taxes are applied has also been amended:
- income which is not property, savings or dividend income
- property income
- savings income
- dividend income
As an extra blow the extension of the freeze on income tax thresholds means that people will be pushed into higher brackets due to rental growth.
What does this mean for SPV’s?
Firstly, this further incentivises the use of SPV’s for property purchases in the BTL market, but rates of dividend tax have also increased:
- dividend ordinary rate: 10.75%
- dividend upper rate: 35.75%
- dividend additional rate: 39.35%
The dividend allowance will remain at £500
This is likely to have less impact on landlords looking to grow a portfolio as generally profits are funnelled into new acquisitions and costs further reduce taxable profits. There are often directors loan accounts in credit from the initial injection of funds and so for many drawing dividends will not be the primary concern.
Summary
The budget in 2025 was likely a relief for many. National Insurance contributions on property income, more stamp duty surcharges, capital gains changes and wealth taxes were widely expected and have not transpired. The 2% additional tax for higher rate landlords will however further incentivise the use of SPV’s for property acquisition going forward.
The good news is that whilst mortgage rates for SPV’s are higher, that gap is narrowing. At present standard mortgage rates are around 4.5% with a £999 fee, whereas SPV mortgages at just over 5.00% with a £999 fee. A year or two ago that gap was often over 1%. Added to that we have the largest banks entering the market, Coventry and Lloyds both announced SPV products this year at competitive rates, HSBC are considering it and Darlington and other building societies are coming onboard so choice and therefore competition is increasing.
