We had waited until the Budget to issue this newsletter expecting “something” to report, however beyond confirming the increase in Corporation Tax, which is a consideration for anyone thinking about incorporating to reduce tax or address IHT issues, there was no mention of the UK property sector.
Business at BFS has been hectic in Q1 with our busiest quarter ever for the property team, despite the slowing of growth in UK house prices. With average UK house prices rising by 6.3% in the 12 months to January 2023, down from a 9.3% increase in December 2022, leaving the average house price standing at £290,000, £17,000 higher than a year ago. This, according to the ONS.
We have included below some articles we thought may be of interest to you. Please reach out if you would like to discuss with a member of the team 0345 5050 888.
Commercial Property Investment
As of April 2023 changes have come into effect which will alter the application of the MEES Regulations to commercial leases with potentially far-reaching consequences for landlords and tenants alike.
The current rules
Under the current MEES Regulations (in force since 1 April 2018) a landlord is prohibited from commencing any let of commercial premises which has a substandard energy efficiency rating. A substandard energy efficiency rating is currently classed as an ‘F’ or a ‘G’ rating, being the two lowest energy efficiency ratings possible, as shown on the Energy Performance Certificate (EPC) for the premises in question.
It should be borne in mind, however, that it is likely that energy efficiency standards will be tightened in the future so that these substandard ratings are amended to include ‘E’ rated premises or even higher.The new rules
Landlords of commercial premises in England and Wales who are continuing to let premises on or after 1 April 2023 will, unless certain exemptions apply, be in breach of the MEES Regulations if:
- the premises are required to have an EPC
- that EPC rating is an F or a G.
The new rules mean that even though a letting of commercial premises may have commenced prior to 1 April 2023, it will still be caught by the new rules unless the premises in question are excluded or exempt in some way.
Premises that are excluded from the new rules.
Some premises are not required to have an EPC, such as:
- some agricultural buildings (where no energy is consumed to condition the indoor climate).
- certain listed buildings.
- short term lets for less than 6 months.
If an EPC is not required, the MEES Regulations will not apply.
Exemptions to the new rules
A landlord letting premises which requires an EPC, but which has a substandard energy rating will be in breach of the MEES Regulations unless one of the following exemptions apply:
- Relevant improvements: if all ‘relevant’ energy efficiency improvements have been made or no ‘relevant’ improvements can be made, and the premises are still sub-standard. ‘Relevant’ improvements are wide ranging and can include such things as double glazing and improved insulation.
- 7-Year payback: if the expected savings in energy efficiency over the proceeding 7 years do not outweigh the cost of the improvements.
- Wall insulation: if the landlord has obtained a certificate from an expert that the cavity wall or other wall insulation recommended would negatively impact the structure of the premises.
- Market value: if an independent assessor determines that the market value of the premises would be reduced by more than 5% by the improvements recommended.
If any of the above exemptions apply, the landlord must enter the relevant details on the Private Rented Sector (PRS) Exemptions Register so as to avoid enforcement action. Once registered, an exemption generally lasts for 5 years after which, the landlord would need to reassess the premises and consider whether, at that point, any improvements can now be made.
The effect of the new rules on landlords
A landlord is not under a positive obligation to make the energy efficiency improvements, nor will failing to do so render the lease of the premises invalid or unenforceable. However, a landlord could be subject to both financial and reputational penalties if action is taken in respect of the breach.
Financial penalties for a breach of MEES Regulations depend on the nature of the premises, duration of the breach and the rateable value of the premises. Fines can be levied up to £150,000. This information has been taken from the full article at Latest News & Deals | Austin Moore & Partners LLP .
SIPPs
Self-Invested Pension Plan can be a tax effective way to own commercial property (not residential property) and save for your retirement at the same time. We are aware however, from recent dealings with both IFAs and Clients that funding for SIPPs and Trusts has become very difficult to find because of the increasing complexity for lenders in both ensuring the front-end ID&V and ongoing compliance once a deal is live.
The costs and risks associated with ensuring regulatory compliance have led some lenders to limit new lends to existing clients only or withdraw from the market completely. At the same time, we are also aware that some SIPP Pension providers and Independent Trustees are also withdrawing from property-based SIPPs and Trusts. Resulting in more SIPPs and Trusts looking for finance, just as the sources available are reducing.
We are pleased to advise that we still have a panel of reputable lenders willing to assist and support cases for SIPP and Trusts wishing to borrow, please contact us with any cases you or your clients wish to discuss for an obligation-free discussion.
Corporation Tax
The Chancellor confirmed the anticipated change to the marginal rate corporation tax regime will continue on 1 April 2023 as planned, with a lower limit of £50k and an upper limit of £250k. One of the main advantages of having properties held in a limited company is less taxation.
For portfolio landlords who operate through a limited company, the difference in paying tax on profits rather than income tax can be quite substantial. However, this financial advantage has just been weakened with a subtle confirmation of April’s planned rise in corporation tax from 19% to 25% during today’s Spring Budget.
Prior to changes to income tax legislation in April 2020, landlords were able to deduct mortgage interest payments from rental income before declaring it for tax purposes – effectively lowering their tax bills.
However, following the change in legislation, many landlords could no longer claim the same level of mortgage relief they could access before, prompting a surge in landlords setting up limited companies so that they avoid a hike in their income tax and pay corporation tax instead.
In fact, recent data from Companies House revealed that there were a record 47,400 new buy-to-let companies incorporated in 2021 across the UK – nearly twice the number that was set up in 2017 and further indication that the sector is shifting away from ‘amateur’ landlords and becoming more professional.
With rising mortgage rates, tightening regulations, and—confirmation of the corporation tax rise, it certainly seems as though even ‘professional’ landlords are in for a rough ride.
Disclaimer.
The opinions expressed in this publication are those of the author. They do not purport to reflect the opinions or views of Business Finance Solutions (UK) Limited. This document has been prepared for general information only and is not guaranteed to be complete or accurate. It does not contain all of the information which an investor may require in order to make an investment decision. If you are unsure whether this is a suitable investment you should speak to your financial adviser. You may get back less than you originally invested.
