Christina Nawrocki FCCA explains the tax changes set to impact on landlord's investments in the buy to let property market.
For many years buy to let has been one of the most popular investments in the UK. Last year the Council for Mortgage Lenders reported buy to let lending accounted for 17% of all mortgages. Indeed, the value of loans agreed for the first three quarters of 2015 was nearly 50% up on the same period in 2014.
Some of the popularity of property investment in recent years can be explained in part by the economic policies that were implemented to deal with the financial crisis. The significant drop in interest rates that have remained at a record low of 0.5% for 7 years has encouraged people away from saving and into borrowing because of the low cost of loans.
In addition the money printing by central banks in the form of quantitative easing has pushed up asset prices including residential property. Factor in the lack of available housing as a result of tight planning laws resulting in demand outstripping supply and you can see why house prices have boomed in recent years.
The Chancellor’s new tax measures announced last year in the Emergency Budget and Autumn Statement could have a significant impact on the market. As we enter into the new financial year, now is the time for landlord’s to understand the changes and review what this means for your portfolio in terms of a future return on your investment.
The tax changes being introduced by the Chancellor
1. The limitation of tax reliefs on finance costs
The tax relief that landlords enjoyed on their buy to let mortgages is being scrapped over the next few years. In the past you could calculate interest on your debt and then for tax purposes subtract it from the rental income you received. It was this net amount after deduction that was then subject to tax. The new rules being phased in for 2017/18 have two major implications for landlords:
Total rentable income received will form part of the overall taxable income not the net amount after mortgage interest has been deducted.
Rent received will be declared and a basic rate tax credit of 20% of total mortgage interest is then allocated against your total income tax liability for the year. For a basic rate tax payer this effectively means there is no change in the tax due on rental income but for a higher rate tax payer this is a major blow. No longer will you be able to get full relief for mortgage interest.
An important element here for both basic rate payers and higher rate payers is that the changes could see more landlords pushed into a higher rate band. That means there are implications for other tax planning matters such as loss of personal allowance, loss of child benefit and even your dividends tax rate. There's a lot to factor in.
Furnished holiday lets will continue to operate under the old rules.
2. New rules regarding wear and tear allowance
Where previously you could write off 10% of your rental income as wear and tear automatically for tax purposes, from April 2016 you will only be able to apply actual replacement expenditure incurred. This will be applicable to both furnished and unfurnished properties.
3. Changes to stamp duty, capital gains and ATED rules
As of April this year purchases of all second properties will come with an additional three percentage points of stamp duty land tax. That means SDLT will rise from £5,000 on a £300,000 property to about £14,000, making it less appealing for new landlords to enter the market.
On the other side of the fence for sellers new rules set to rock the market involve capital gains on property sales being due for payment to HMRC within 30 days of the transaction completing, as opposed to the previous once a year payment. This is effective from April 2019.
There are also new reduced rates being introduced from April 2016 regarding Annual Tax on Enveloped Dwellings (ATED) whereby more properties will be caught by this as the threshold falls to properties valued at £500,000. The implications and detail of ATED will be explored more in future posts on this blog.
What to do about it
If you’re an existing property investor or someone considering entering this marketplace, as always the effect of the changes very much depend on your personal circumstances. The key point is that the tax burden for many landlords is due to become heavier meaning it's now even more important to consider your overall income and tax plan accordingly. If you need further advice, be sure to get in touch.
The content of this post is up to date and relevant as at 31/03/2016.
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