Keeping up with tax changes is no easy feat. We’ve outlined the latest buy-to-let tax updates so you know what’s changed, what’s changing and what to expect.
HOW WILL THE CHANGES TO BUY-TO-LET TAX AFFECT THE RENTAL PROPERTY MARKET?
The government have introduced a lot of new tax rules for landlords over the last few years. We’re still adapting to the changes from the 2015 Summer Budget and will face further updates in April 2019.
How much do you really know about these buy-to-let changes? Maybe you’ve found yourself asking: “What impact will these changes have on me?” The last thing an investor needs is uncertainty. Our guide outlines the current and future buy-to-let tax changes to explain what you need to know and how the changes will affect you.
WHAT DO THE CHANGES TO BUY-TO-LET TAX MEAN?
The tax changes affect those who intend to purchase, own or intend to sell a buy-to-let property.
In the 2015 Summer Budget, it was announced that the amount you’d pay when purchasing a buy-to-let property would increase and that the tax relief you could claim would be restricted. HMRC are still phasing in some of the new tax rules for landlords, so it’s important you understand how you’ll be affected over the next few years.
The chancellor also announced changes to landlord tax relief in the 2018 Autumn Budget which will come into effect from April 2020. We’ll explain everything, so you’re not left unpleasantly surprised.
WHAT CURRENT BUY-TO-LET TAX CHANGES DO YOU NEED TO BE AWARE OF?
1Stamp Duty Increase
In April 2016, the Stamp Duty payable on any new buy-to-let property purchase increased to 3% above the standard rate for residences.
|Band||Old Stamp Duty Rate||New Stamp Duty Rate|
|£0* - £125k||0%||3%|
|£125k - £250k||2%||5%|
|£250k - £925k||5%||8%|
|£925k - £1.5m||10%||13%|
The increased rate is payable on the purchase of additional properties, including buy-to-lets and second homes. You can find out more information in our guide: Stamp Duty on Second Homes.
Further considerations you may need to be aware of include:
Let to buy: if you move out of your main residence, without selling it and buy another property, you’ll have to pay the 3% Stamp Duty surcharge. However, if you sell your original residence within 36 months of completing the purchase you’ll be eligible for a full refund of the additional Stamp Duty you paid. Learn more about claiming a refund in our guide.
Granny annexes: if the house you buy has a “granny annexe” then it’s unlikely you’ll have to pay the extra 3% Stamp Duty. You’ll only be liable for the higher rate if the annexe:
- Can be sold separately from the main house
- Has its own entrance
- Has its own water and electricity supplies
- Receives its own Council Tax bill
- Is worth more than £40,000 by itself
2The Replacement of the Wear and Tear Allowance
Most landlords know you can deduct certain allowable expenses from your rental income to reduce the amount of Income Tax you pay. In 1 April 2016, the Wear and Tear Allowance (WTA) – which allowed landlords of fully furnished properties to claim an annual tax deduction based on 10% of their rental income - was replaced by the Replacement of Domestic Items Relief. This compensated them for the replacement of furnishings and was provided even if no purchases were made throughout the year. As the old Wear and Tear Allowance was based on rental income, landlords with higher income from rent received an unfair advantage.
Under the Replacement of Domestic Items Relief, landlords can only claim for the actual cost of replacing furnishings. This covers moveable furniture, such as televisions, carpets, curtains, fridges and crockery.
Items such as fitted units, baths, kitchens and boilers are usually still classed as allowable expenses, so you shouldn’t be taxed on them - so long as you only replace them. If you want to deduct them as allowable costs, you can’t make improvements; they must be considered repairs
3Finance Costs Restriction and Tax Relief
Before 2017, you could deduct finance costs from your rental income, like mortgage interest. HMRC started phasing out the finance costs you could deduct in 2017 over a 4 year period, simultaneously introducing a new relief. This means that, from April 2020, landlords will no longer be able to deduct any of their mortgage interest from their rental income when calculating their taxable profit. Instead, landlords will receive a 20% tax relief on mortgage interest payments. For more information on how this new relief will work, see our guide: Rental Income and Other Landlord Taxes.
CALCULATING THESE BUY-TO-LET TAX CHANGES
The new mortgage interest tax rules are currently being phased in. To figure out how this will affect the tax you pay, see our example below.
- You’re a higher rate taxpayer who pays 40% tax
- You have a rental income of £15,000 a year
- You have a mortgage interest of £10,800 a year - 66% of your rental income
Below is the worked example of how this relief is being phased in:
|Reduction in Mortgage Interest Allowance||0% = £0||25% = £2,700||50% = £5,400||75% = £8,100||100% = £10,800|
|Total Rental Income on which Tax is Paid||£4,200||£6,900||£9,600||£12,300||£15,000|
|Tax at 40%||£1,680||£2,760||£3,840||£4,920||£6,000|
|Allowable Tax Relief at Basic Rate (20% of the annual mortgage interest)||£0||£540||£1,080||£1,620||£2,160|
|Total Tax Payable (Tax at 40% minus Tax Relief)||£1,680||£2,200||£2,760||£3,300||£3,840|
In this example, your profit falls from £2,520 in 2016/17 to £360 in 2020/21. Representing a total reduction in profit of £2,160.
wHAT FUTURE CHANGES TO BUY-TO-LET TAX DO YOU NEED TO BE AWARE OF?
1The Restriction of Private Residence Relief
When you sell your main residential property, you receive something called Private Residence Relief. Private Residence Relief means that you don’t have to pay Capital Gains Tax. You usually pay Capital Gains Tax upon the sale of a property that’s not your main residence, so landlords who sell buy-to-lets normally pay CGT.
As a landlord, you can claim Private Residence Relief for the period that you used the property you’re selling as your main residence, as well as the final 18 months that you own the property – this is regardless of whether you rented it out in those final 18 months. If you own a property for more than 18 months after you’ve moved out, you’ll pay CGT on the months not covered by PRR.
From April 2020, the relief period will be reduced from 18 months to 9. This will most likely affect those who struggle to sell their previous property, including “accidental landlords”.
See our guide, Capital Gains Tax on UK Property, for more information on Capital Gains Tax.
2The New Rule for Lettings Relief
Lettings Relief can greatly reduce the amount of Capital Gains Tax you pay when you sell a buy-to-let. You can make up to £40,000 in tax-free gains.
To qualify at the moment, you must:
- Already qualify for Private Residence Relief, i.e. the property you’re selling was previously your main residence
- Have let out part or all of the property as residential accommodation
From April 2020 you can only claim Lettings Relief if you’re still living there at the same time that you sell it.
Find out more in our guide: Capital Gains Tax on UK Property.
What can I do?
Tax laws are always changing, so don’t worry if you already own a buy-to-let property. At John Charcol, we’re offering all buy-to-let owners and property investors the opportunity to call us for a review of your situation. You can call our experts for free on 0344 346 3672.
Our advisers can assess your portfolio and help you decide whether:
Now is the right time to remortgage:
We can help you make sure you’re on the best rate possible to maximise your rental yield. Our experts can advise you on rates from across the market.
You could benefit from becoming a company:
Corporation Tax is due to fall to 18% in 2020. Our partners can look at your investment and see if you should consider converting to a company.
We can work with your tax adviser, or recommend one, to review whether you’re making the most of your allowances.