Buy to Let – What are the tax changes and what do they mean?
With the property market seeing the slowest growth since 2013 and the raft of tax changes for ‘buy to let’ landlords that have been introduced over the past few years, for some the appeal of investing in property has really lost its shine.
So what are the changes and how might they impact on your current or future property investments and profit margins? Summarised below are some of the main issues to be aware of!
Interest relief and associated costs
From 6 April 2017 individual landlords will no longer receive higher rate tax relief on their mortgage interest or associated costs of borrowing. These changes are being phased in over four years and the full impact will not be felt until the 2020/21 so do not fear…..yet!
Rental profits will now be calculated without deducting interest or costs. This will mean that profits are higher and landlords may be pushed into higher tax brackets or find they are over certain ‘tax’ thresholds and they may lose certain benefits and allowances.
Relief for these costs will instead be made by deducting from the tax liability an amount equal to 20% of the total interest payments made during the year, in effect providing basic rate tax relief for all.
Even for a modest landlord these changes can be significant. Let’s take the example of Harry. Harry is employed and is a higher rate tax payer. He also owns two properties which he rents out for £20,000 and pays mortgage interest of £10,000 per annum.
Before these changes, Harry’s net income from the properties after tax was £6,000. After the changes are implemented in full, his net income after tax will be £4,000. Harry’s tax bill has increased by £2,000 per annum. Not only that, the increased rental profits mean that Harry’s ‘taxable’ income total has increased from £50,000 to £60,000 and this has resulted in him losing his entitlement to child benefit costing him around a further £1,600 per year.
This one tax change has cost Harry £3,600 per year!
Stamp Duty Land Tax
From 1 April 2016 higher rates of Stamp Duty Land Tax apply to the purchase of additional residential properties such as buy-to-lets. Where you own any residential property and acquire a second property, an additional rate of 3% may be charged over and above the standard SDLT rates. This doesn’t sound like too much of an increase, but looks can be deceiving!
Let’s imagine that Harry now wants to acquire a 3rd buy to let property for £300,000. He already owns residential property and is not looking for this to replace his main home so will fall squarely within the additional rate rules. Before the change Harry would have paid SDLT of £5,000. Now his liability will be £14,000. This is almost a 200% increase!!
From 1 March 2019, the SDLT return and tax will also be due within 14 days of completion!
Capital Gains Tax
When the CGT rates were lowered to 10% and 20% for basic and higher rate taxpayers this was very welcomed however, landlords didn’t need to get too excited. The rates do not apply to gains on residential properties and these continue to be taxed at the higher rates of 18% and 28% for gains falling with the basic and higher rate tax brackets respectively.
The recent budget introduced some surprise announcements which may have an impact if the buy to let property was previously occupied as the only or main residence. The final period of deemed occupation is being halved to 9 months and ‘Lettings’ relief, which gave a maximum £40,000 deduction per person against the capital gain, will now only be available if the landlord also occupies the property with the tenant. Both of these measure will increase the chargeable capital gain and tax.
From 6 April 2020 the Government are planning to changes the rules so that any CGT due on the sale of a residential property will be payable within 30 days of the sale completion rather than 31 January following the end of the tax year. Missing this deadline could be costly!
Non Resident Landlords
Not unsurprisingly, non resident landlords haven’t escaped HMRCs ‘crackdown’ and the rules were changed from 6 April 2015 to ensure that even if the individual is non UK resident, any gain arising on the disposal of UK residential property fell within the charge to UK tax.
So what should you do know?
Don’t panic! The tax costs of buy- to- lets have undeniably increased no matter how big or small the portfolio, but investing in bricks and mortar is not just about tax. You have to consider the long term picture.
There is no doubt that for some individuals, the changes have made them realise that its time to get out of the market but for others it is still a good opportunity. Looking at the level of borrowing and if this can be restructured, how your portfolio is owned and managed and whether or not commercial property investment might offer opportunities, are all areas which may be considered and where savings could be achieved.
How Wells Advisory can help?
Having worked with a large number of landlords, it has shown that there isn’t a ‘one size fits all’ answer. For some the impact of the changes will be minimal and they will carry on regardless. For those others who are facing a significant impact on their profits we have worked with them to understand what they are hoping to achieve longer term, consider all of the options that are available and where necessary help to implement new ownership structures.
Should you have any concerns regarding your property portfolio or require any guidance we’d be happy to advise you too. Please contact us to book a free initial consultation on 01892 507288.