Changes to UK Taxation on Rental Properties
As a Landlord you are probably aware of certain changes due to be introduced by the Government in the coming months and years.
The 4 main changes affect:
- Additional 3% Stamp Duty on all Buy To Let Transaction amounts after 1st April 2016
- Mortgage Interest Tax Relief Being capped at 20%
- Changes to Capital Gains Tax Payments
- Wear & Tear Allowance Ceases in 2017
Stamp Duty Increase After 1st April 2016
From April 1st this year buying a 2nd home or buy-to-let property will now attract a 3% Stamp Duty surcharge on the whole price.
Value of second property/buy to let
SDLT from 1 April 2016
|Increase in tax
Obviously this has significant impact on the short-term returns on investment for landlords and investors alike. As you would imagine this has created a rush of buy-to-let deals with time running out to complete a purchase in time. However, we still have some great property deals and investment opportunities throughout Cheshire, Manchester and the North West so you can still make the most of the lower Stamp Duty before 1st April 2016.
Icon 25, Northern Quarter
Asking Price £164,950
Buy Before 1 April 2016 Save £4,948 SDLT Pre April ’16 £799
SDLT Post April ’16 £5,747
The Nile, Southern Gateway
Asking Price £182,500
Buy Before 1 April 2016 Save £5,475 SDLT Pre April ’16 £1,150
SDLT Post April ’16 £6,625
Mortgage Interest Tax Relief Being Scrapped
Government Proposals Mean That Mortgage Interest Tax Relief Will Be Fully Withdrawn By 2020
It was announced in the July Budget that the amount of mortgage interest that landlords can claim against tax will be reduced, meaning that landlords will make higher profits subject to tax.
The tax changes, on which there was no consultation, will be phased in from 2017 and fully implemented by 2020 so that all taxpayers will get tax relief at basic rate only i.e. 20%.
The percentage interest that can be set against profits in the coming years is as follows:
In a nutshell, landlords will no longer be able to deduct the cost of their mortgage interest from their rental income when they calculate a profit on which to pay tax. So tax payable will, for some, exceed all of their profits, and some landlords could find themselves paying tax even where they are making losses.
The Government will allow a tax credit equivalent to basic rate tax (20pc) on the interest only, but this is deducted at the end of the calculation which may unwittingly push some into a higher rate tax bracket.
Wealthier landlords without mortgages will not be affected, nor will companies as interest deductions will still be allowable.
Example 1 current rules
£10,000 rental income
£5,000 mortgage interest costs
£1,000 other costs
You will be taxed on this at your marginal rate, so a basic rate taxpayer would pay tax of £800, and a higher rate (40%) taxpayer would pay £1,600
Example 2 new rules (2020/21 onwards with no deduction allowable)
£10,000 rental income
(£5,000 mortgage interest costs – now not deductable)
£1,000 other costs
You will be taxed on this at your marginal rate, so a basic rate taxpayer would pay tax of £1,800, and a higher rate (40%) taxpayer would pay £3,600.
This is not the end of the story though as you are still able to claim a deduction of 20% of the £5,000 which is £1,000.
The Basic rate taxpayer will pay tax as follows
20% tax on £9,000 profit = £1,800
Minus £1,000 deduction (20% of £5,000 interest cost)
=£800 to pay (Exactly the same as before)
The Higher rate taxpayer will pay tax as follows
40% tax on £9,000 profit = £3,600
Minus £1,000 deduction (20% of interest cost)
=£2,600 tax to pay
You will notice that the basic rate taxpayer ends up paying exactly the same but the higher rate taxpayer ends up paying £1,000 more. However the basic rate taxpayer can be affected as the allowance of £1,000 is added back after tax is initially calculated meaning the basic rate taxpayer is more likely to fall into being a higher rate taxpayer.
For more in depth detail you can give Simon Balderson, our Mortgage Advisor, a call on 0161 942 4145, or you can e-mail him at [email protected] for some obligation free advice on how to structure any property finance to make the most out of these new tax changes.
Changes to Capital Gains Tax Payments
In A Nutshell Capital Gains Tax Payments Will Need To Be Paid In 30 Days
From April 2019, the CGT liability on the sale of any residential property that is not your main home (principal private residence) will have to be paid within 30 days. Currently, you have to pay the liability somewhere between 10 and 21 months after it has been sold.
Obviously this presents a significant impact on cash flow for landlords and investors.
Wear & Tear Allowance Ceases in 2017
The Automatic 10% Allowance Tax Break Is Going To Cease – Instead Deductions Will Need To Be Based On Actual Costs Incurred.
Landlords will no longer have automatic entitlement to a 10% tax break for wear and tear of their properties – landlords of furnished properties can currently deduct 10% of their rent from their profit to account for wear and tear, irrespective of their expenditure – in future they will only be able to deduct from their tax bill the costs they actually incur on replacing furnishings, appliances etc.
These changes could mean that it is more tax efficient for landlords and investors to hold off on major reparations until 2017, when the actual costs can be deducted. The changes however mean that expenditure incurred must be evaluated on an individual basis to make sure it will be allowable deduction for tax purposes.
Examples (Allowable Repairs & Renewals)
- exterior and interior painting and decorating,
- damp and rot treatment,
- mending broken windows, doors, furniture and machines such as cookers or lifts,
Example (Capital expenditure – which should only be included in Capital Gains Tax Calculations)
- expenditure which adds to or improves the land or property; for example, converting a disused barn to a holiday home,
- the cost of refurbishing or repairing a property bought in a derelict or run-down state.
For more detailed, obligation free advice, you can give Simon Balderson, our own Mortgage Advisor, a call on 0161 942 4145, or you can e-mail him at [email protected]