Buy To Let Tax Changes

Chancellor George Osborne’s Summer Budget and Autumn Statement were both full of surprises for buy-to-let landlords who are facing tax hikes that could seriously curtail their rental profits.  Some of these changes are being introduced as soon as April 2016 and below is a summary of the main changes:

Stamp Duty Land Tax (SDLT)
At present if you buy a residential property you pay stamp duty at a progressively-applied rate that depends on the value of the property. You pay nothing on the first £125,000, then at each of four value thresholds a higher rate of tax is applied on the portion of the price above that level. From 1 April 2016, the rate of SDLT on the purchase of a buy to let property, or indeed on the purchase of a second home, costing more than £40,000, will be subject to a 3% surcharge. If the rate of SDLT is currently 1%, it will be 4% under the new rules. If the rate is currently 3% now, it will be 6% post 1 April 2016.

Wear and Tear Allowance
Currently, landlords  of  fully  furnished  residential properties can  elect  to  claim  a  tax  relief  for wear and tear on  furnishings  without necessarily  incurring  any  cost.  They  can  claim  an  annual  allowance  of  10% of  the  rent  received less rates expenditure (if paid by the landlord rather than the tenant). This allowance will be replaced with a relief that enables all landlords to deduct the costs they actually incur on replacing furnishings in the property.

Mortgage Interest
From April 2017, landlords will not be able to deduct mortgage interest from their rental income before it is assessed for tax, but will instead be able to claim tax relief on finance costs at the basic rate of 20% – regardless of which Income Tax bracket you’re in. Therefore, those in the higher and additional rate tax bands will pay more tax.

The fact that your total taxable income will now be higher could have significant implications. It could mean that some basic rate taxpayers are pushed into the higher rate tax band – but will only receive tax relief at the basic rate. It could also push some higher rate taxpayers into the additional rate band. This change will be introduced gradually from 6 April 2017.

Here is a worked example assuming the landlord is a higher rate tax payer:

Your buy to let properties earn a combined rental income of £20,000 a year with combined mortgage interest costs of £13,000 a year.

Under the current rules, the mortgage interest is deducted so tax is only due on the £7,000 difference, at a rate of 40%, giving you a tax bill of £2,800. This leaves you with a profit after tax of £4,200.

Under the new rules which will be fully introduced by 2020, working out the tax is slightly more complicated: 40% (your Income Tax rate) of £20,000 (your taxable income from the properties) is £8,000, but the £13,000 mortgage interest qualifies for tax relief at 20%.

So subtract the tax relief: 20% of £13,000 is £2,600. This leaves you with a tax bill of £5,400(£8,000 – £2,600). Your profit is now £1,600, a reduction of £2,600 and your tax bill has now increased by 93%.

You may wish to contact your accountant or tax advisor to discuss available tax planning opportunities. If you currently prepare your own Tax Return you may need to seek professional advice to help minimise your tax liability.

Vicki Johnston