Buy to let landlords need to understand some big property tax changes that are on the way from April as they may affect the profitability of their portfolios.
Now is a good time for landlords to look at a tax strategy, as the government’s overhaul of the rules is likely to drastically change the market over the next few years.
The new rules would seem an attempt by Chancellor George Osborne and Bank of England governor to cool the buy to let market and perhaps a way to free up affordable properties for first time buyers.
So here are the details of the major changes:
Enhanced stamp duty on property investment
From April 1, 2016, stamp duty land tax (SDLT) will make buying homes for investment more expensive.
The rules are:
- The enhanced rate applies to all homes valued at £40,000 or over
- The tax is against properties in England and Wales – See Land and Buildings Transfer Tax for stamp duty in Scotland
- The tax is paid on buying a home that is not intended for use as a main residence – this nets buy to lets, houses in multiple occupation, second homes, homes bought by parents for children and uncommercial lets, which are homes bought for a relative or friend to live in.
Holiday lets are excluded from the enhanced tax rate.
Replacement Relief for Buy to Lets
From April 6, 2016, the 10% wear and tear allowance for furnished rental properties is scrapped and replaced with replacement relief.
The main points are:
The distinction between furnished and unfurnished homes disappears from April 6
Instead of the 10% wear and tear allowance, all buy to let landlords can claim replacement relief when they replace furniture, furnishings, appliances and kitchenware supplied for a tenant’s use
Holiday lets are excluded as owners can make claims through the capital allowance procedure
Mortgage Interest Relief
This controversial measure is due to start from April 6, 2017.
The relief tapers the amount higher rate and additional rate taxpayers can claim for mortgage and finance interest in their property businesses over four years.
By April 2020, landlords who pay tax above the basic rate will have these claims restricted to the same amount a basic rate taxpayer can claim.
At the same time, the way taxable rental profits are calculated changes, too.
Basically, the higher the mortgage interest rate on a buy to let, the more the new relief will reduce profits.
The Nationwide reckons a £200,000 buy to let with a £150,000 mortgage generating £800 rent shows a net profit of £2,160 a year – but under the new rules this will plunge to £960.
Landlords need to consider how losing mortgage interest relief may affect their portfolios and what action they can take to reduce the impact.
Each landlord needs a personal tax plan depending on the size and type of a property portfolio, other income and how the property business operates.