Taxation… it’s one of those things that nobody really likes to face head on, but of course it often becomes extremely important to understand the rules (and changes to rules) to ensure that you are best equipped to plan for the future.
In recent months, there have been many changes to the buy-to-let sector which has meant that
a lot of landlords have reached out to us to gain a greater insight into how these rules are going to affect them.
We will look at the majority (but not all) of the changes in a little bit more detail below.
Wear and Tear Allowance
Previously, on a furnished rental property, landlords were able to claim an additional deduction against their rental profits. This was broadly speaking 10% of the total rental income figure (for example, if your rents were £15,000, then the deduction under wear and tear would have been £1,500).
HMRC deemed this too generous and as of 6 April 2016, only expenditure on ‘replacement of furnishings’ would be deductible. There are added complexities on the amounts of deductions available in relation to the new replacement item so it would be highly recommended that you seek advice to ensure a correct deduction is claimed.
Additional Stamp Duty?
Again, since 1 April 2016, an additional tax charge (Stamp Duty) was introduced by the government on any homeowners who were acquiring a 2
nd property. The primary aim of this was for landlords to be deterred into acquiring multiple properties in the hope that this would increase housing supply for the first time buyer market.
The rates at which the additional 3% charge is applied is below.
| Band |
Existing Residential SDLT Rates |
New Additional Property SDLT Rates |
| £0 - £125k |
0% |
3% |
| £125k - £250k |
2% |
5% |
| £250k - £925k |
5% |
8% |
| £925k - £1.5m |
10% |
13% |
| £1.5m+ |
12% |
15% |
There are reliefs available however, if you are replacing your main residence and under certain conditions.
Mortgage Interest Caps
Up until recently any mortgage interest suffered in relation to the funding of your rental buy-to-let portfolio was deductible in full against your rental income profits. This would mean that any additional rate taxpayers would be receiving up to 45% tax relief on any mortgage interest that they had suffered.
However, starting from 2017/18 onwards, the amount of relief available is capped. The ultimate aim would be to only provide 20% tax relief on the mortgage interest suffered by a tax payer (in essence, this means our additional rate taxpayer will be 25% worse off per year on the mortgage interest suffered).
The gradual phasing in of this change is likely to have a significant impact on homeowners as the change in taxation takes full effect from 2020/2021. As such, some property tax specialists have designed personalised models to map out the cash flow effects of these tax changes so that you can prepare better and plan for the future.
The other change is how this relief is given to a tax payer. Whereas previously the deduction was made before the calculation of tax, going forward, the tax will be charged on the profits (excluding mortgage interest) and only a 20% tax credit on the mortgage interest paid being applied afterwards. The NET result? The possibility of landlords paying tax on non-existent profits!
A quick example is as follows:
|
As now |
Transitional Rules |
New Rules |
| 2016/17 |
2017/18 |
2017/18 |
2018/19 |
2019/20 |
| Rental Income |
£6,000.00 |
£6,000.00 |
£6,000.00 |
£6,000.00 |
£6,000.00 |
| Mortgage Interest |
£3,000.00 |
£3,000.00 |
£3,000.00 |
£3,000.00 |
£3,000.00 |
| Profit Before Tax |
£1,000.00 |
£1,000.00 |
£1,000.00 |
£1,000.00 |
£1,000.00 |
| % Interest Relief |
£1.00 |
£0.75 |
£0.50 |
£0.25 |
£0.00 |
| Interest Now Taxable |
£0.00 |
£750.00 |
£1,500.00 |
£2,250.00 |
£3,000.00 |
| Taxable Profit |
£1,000.00 |
£1,750.00 |
£2,500.00 |
£3,250.00 |
£4,000.00 |
| Tax Chargeable |
£400.00 |
£700.00 |
£1,000.00 |
£1,300.00 |
£1,600.00 |
| Less 20% Tax Credit |
£0.00 |
£150.00 |
£300.00 |
£450.00 |
£600.00 |
| Tax Due |
£400.00 |
£550.00 |
£700.00 |
£850.00 |
£1,000.00 |
| NET Profit |
£600.00 |
£450.00 |
£300.00 |
£150.00 |
£0.00 |
A possible non tax related issue?
Although not strictly a tax related issue for landlords, recent reports suggest that landlords could face a penalty of up to £30,000 for a range of housing offences (such as failure to obtain a House of Multiple Occupation Licence).
As such, it is not just the tax issues that you need to ensure you are on top of, but also the various legal issues surrounding home ownership and letting a property.
To ensure you are compliant and up to date with all the latest taxation related issues and to help you plan for the future, make sure you
call now for a free consultation with one of our dedicated property tax specialists on 020 8429 9245 or email
[email protected].