A Landlord’s Certainty: The Taxation of Property Investment

Abstract

In late 2015, Heather Wilson is finalizing the details on the acquisition of her first investment property, in the Kensington and Chelsea neighborhood of London. As she prepares to become a property investor, Wilson has to learn the details of how property investment is taxed, for only her after-tax returns will add to her wealth over time. As part of her learning, Wilson understands that how she finances the investment will influence the taxes she pays to Her Majesty’s Revenue and Customs.

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

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Resources

Exhibit 1: House Price Growth, 1996–2016

The graph has differently colored lines to show the growth rates of the different regions. In the graph, x axis is irregularly scaled from 1/11/96 to 6/1/16 and y axis is scaled from −30 to 50 units with a gap of 10 units. The graph is titled “Year over year growth rate of home prices (percent).” The data shown by the graph are tabulated as follows:

Years

Kensington and Chelsea

London

United Kingdom

1/1/96

9

2

2

8/1/96

5

12

5

3/1/97

20

10

7

10/1/97

25

18

10

5/1/98

15

15

12

12/1/98

−1

9

11

7/1/99

18

14

10

2/1/00

14

25

17

9/1/00

18

18

14

4/1/01

10

10

9

11/1/01

0

14

5

6/1/02

9

18

15

1/1/03

10

12

29

8/1/03

−10

7

12

3/1/04

12

8

8

10/1/04

25

9

14

5/1/05

16

6

-

12/1/05

19

4

7

7/1/06

14

8

9

2/1/07

23

14

10

9/1/07

38

15

9

4/1/08

5

1

1

11/1/08

−25

−10

−10

6/1/09

−10

−5

−5

1/1/10

20

12

9

8/1/10

7

10

5

3/1/11

18

4

−2

10/1/11

7

2

0

5/1/12

2

2

0

12/1/12

15

8

2

7/1/13

10

7

4

2/1/14

14

15

7

9/1/14

10

20

20

4/1/15

7

10

6

11/1/15

−5

14

8

6/1/16

−10

8

7

A line graph shows the house price growth rates in Royal Borough of Kensington and Chelsea, London, and United Kingdom from 1996 to 2016.

Source: UK Office for National Statistics House Price Index.

Exhibit 2: Property Location

The map shows the stations of the London that are around the property. The property itself is shown by a star mark. The stations around the property, listed in the order of their proximity, are as follows:

Earl’s Court, which is in its south west.

Gloucester Road, which is in its east.

High Street Kensington, which is in its north.

A map of London shows the location of Wilson’s property in Cromwell Road, Royal Borough of Kensington and Chelsea.

Location of property marked by red star.

Source: London Town, “Cromwell Road Location Map,” accessed February 15, 2019, http://www.londontown.com/LondonStreets/cromwell_road_909.html.

Exhibit 3: Property Floor Plan

On the top left corner of the image, the text reads:

“Cromwell Road, SW5

Approx. gross internal area

472 Sq. Ft/43.9 Sq. M.”

On the top right corner of the image there is compass that shows the north, which is toward its top right. The floorplan shows a reception room, kitchen, bathroom, and bedroom. The kitchen is toward the bottom right corner of the reception room and its entrance is from the reception room. The bedroom is toward the top right corner of the reception room and its entrance is from a lobby that opens from the top right corner of the reception room. The bathroom is opposite to the bedroom and shares a common wall with the kitchen. Its entrance and the bedroom’s entrance are opposite to each other and both are from the lobby. The dimensions shown in the image are as follows:

Reception Room

15′11 × 10′4

(4.9 m × 3.1 m)

Kitchen

7′3 × 6′3

(2.2 m × 1.9 m)

Bedroom

13.1′ × 12′2

(4.0 m × 3.7 m)

An image shows the floor plan of Wilson’s property on Cromwell road.

Source: Bective Leslie Marsh, accessed February 15, 2019, http://www.bective.co.uk.

Exhibit 4: Gross Rental Yields by Neighborhood

The different areas shown in the map are as follows:

  • Brent
  • Camden
  • Islington
  • Hackney
  • Ealing
  • Hammersmith and Fulham
  • Kensington & Chelsea
  • Westminster
  • City of London
  • Southwark
  • Lambeth
  • Wandsworth
  • Richmond Upon Thames
  • Merton
  • Kingston Upon Thames

A map shows gross rental yields in different areas of London.

Source: TotallyMoney.com; author calculations.

Exhibit 5: Historical Rent Growth in London

The graph has differently colored lines to show the nominal and real growth rates. In the graph, x axis is scaled for each quarter of the years 2006 to 2016 and y axis is scaled from −6.00 to 6.00 units with a gap of 2.00 units. The graph is titled “Annual growth rate of London rental rates.” The approximate values from the graph are tabulated below:

Years

Real

Nominal

1/1/06

−0.20

1.90

4/1/06

0.20

2.10

7/1/06

0.30

2.60

10/1/06

−0.20

2.20

1/1/07

−0.50

2.00

4/1/07

−0.10

2.40

7/1/07

1.00

2.60

10/1/07

1.20

3.90

1/1/08

2.40

5.00

4/1/08

1.70

4.80

7/1/08

−0.10

4.60

10/1/08

0.10

4.20

1/1/09

1.00

4.00

4/1/09

1.40

3.80

7/1/09

0.40

2.00

10/1/09

−0.10

0.80

1/1/10

−4.10

−1.00

4/1/10

−5.00

−1.60

7/1/10

−4.00

−1.40

10/1/10

−2.50

0.00

1/1/11

−2.00

1.80

4/1/11

−1.00

3.00

7/1/11

−0.10

4.00

10/1/11

−0.10

4.60

1/1/12

1.50

5.00

4/1/12

1.80

5.40

7/1/12

2.40

5.20

10/1/12

2.20

5.10

1/1/13

1.90

4.80

4/1/13

1.70

4.20

7/1/13

1.50

4.00

10/1/13

1.30

3.80

1/1/14

1.00

3.00

4/1/14

0.80

2.60

7/1/14

0.60

2.00

10/1/14

0.80

2.10

1/1/15

2.00

3.00

4/1/15

3.60

3.60

7/1/15

3.80

3.80

10/1/15

4.10

4.10

1/1/16

3.80

4.00

4/1/16

3.40

3.00

7/1/16

2.00

2.60

10/1/16

1.70

2.20

A line graph shows the rent growth in London from 2006 to 2016.

Source: UK Office for National Statistics’ Experimental Index of Private Housing Rental Prices and consumer price inflation data. The index calculates changes in the rents for both new and ongoing tenancies.

Exhibit 6: Property Pro Forma

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

Rent

22,104.00

22,767.12

23,450.13

24,153.64

24,878.25

25,624.59

26,393.33

27,185.13

28,000.69

28,840.71

29,705.93

Vacancy

460.50

474.32

488.54

503.20

518.30

533.85

549.86

566.36

583.35

600.85

618.87

Total revenue

21,643.50

22,292.81

22,961.59

23,650.44

24,359.95

25,090.75

25,843.47

26,618.78

27,417.34

28,239.86

29,087.05

Property management

1,731.48

1,783.42

1,836.93

1,892.03

1,948.80

2,007.26

2,067.48

2,129.50

2,193.39

2,259.19

2,326.96

Maintenance

1,200.00

1,236.00

1,273.08

1,311.27

1,350.61

1,391.13

1,432.86

1,475.85

1,520.12

1,565.73

1,612.70

Insurance

675.00

695.25

716.11

737.59

759.72

782.51

805.99

830.16

855.07

880.72

907.14

Total expenses

3,606.48

3,714.67

3,826.11

3,940.90

4,059.13

4,180.90

4,306.33

4,435.52

4,568.58

4,705.64

4,846.81

NOI

18,037.02

18,578.13

19,135.47

19,709.54

20,300.82

20,909.85

21,537.15

22,183.26

22,848.76

23,534.22

24,240.25

CapEx

1,803.70

1,857.81

1,913.55

1,970.95

2,030.08

2,090.98

2,153.71

2,218.33

2,284.88

2,353.42

Sales price

1,011,828.95

Sales expenses

50,591.45

Property cash flow

−565,000.00

16,233.32

16,720.32

17,221.93

17,738.58

18,270.74

18,818.86

19,383.43

19,964.93

20,563.88

982,418.30

Property IRR

8.1%

Exhibit 7: Scheduled Phase-Out of the Deductibility of Financing Charges

Tax yeara

Percentage of Finance Costs Deductible from Rental Income

Percentage of Basic Rate Tax Reduction

2016

100%

0%

2017

75%

25%

2018

50%

50%

2019

25%

75%

2020

0%

100%

2021 and beyond

0%

100%

aThe tax year runs from April 6 to the following April 5. To simplify the calculation, this is being ignored.

Source: Her Majesty’s Revenue and Customs.

Exhibit 8: Stamp Duty Land Tax

Property or Lease Premium or Transfer Value

SDLT Rate

Up to £125,000

Zero

The next £125,000 (the portion from £125,001 to £250,000)

2%

The next £675,000 (the portion from £250,001 to £925,000)

5%

The next £575,000 (the portion from £925,001 to £1.5 million)

10%

The remaining amount (the portion above £1.5 million)

12%

… plus …

an additional 3% if the property purchaser already owns a residential property and purchases another after November 26, 2015

Exhibit 9: Bank of England Base Rate

Year

Day

Month

Rate

2006

3

Aug

4.7500

9

Nov

5.0000

2007

11

Jan

5.2500

10

May

5.5000

5

July

5.7500

6

Dec

5.5000

2008

7

Feb

5.2500

10

April

5.0000

8

Oct

4.5000

6

Nov

3.0000

4

Dec

2.0000

2009

8

Jan

1.5000

5

Feb

1.0000

5

Mar

0.5000

2016

4

Aug

0.2500

Source: Bank of England, “Interest Rates and Bank Rate,” accessed February 15, 2019, https://www.bankofengland.co.uk/monetary-policy/the-interest-rate-bank-rate.

Exhibit 10: Financing Choices

Repayment Mortgages

Interest-Only Mortgages

LTV

60%

75%

60%

75%

Rate

2.37%

2.77%

2.47%

2.87%

Fixed period

5 years

5 years

5 years

5 years

Amortization

25

25

Interest only

Interest only

Reset rate

4.74%

4.74%

4.74%

4.74%

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

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