Buy To Let Tax Changes
Buy to let tax changes could affect you if you have property portfolio or about to start one. Buy To Let is an attractive prospect for anyone looking to have an additional revenue stream. This scheme was responsible for the property success story of recent years. However recently new tax changes have been introduced which could have an impact on the profitability of buying residential properties to rent out. Here we are going to run down the most important changes and make sure you fully understand what these changes mean.
What is changing?
The government is gradually reducing what landlords can claim on the residential property. At the moment landlords can deduct their mortgage interest from their rental income, however, in future, this will not be allowed. Now, they will get a 20% basic tax rate based on whichever is lower,
- Finance Costs,
- Individual taxable rental profits,
- Individuals total income.
As of April 2017, this relief will gradually reduce to allow landlords time to adjust.
- In 2017/18 the deduction from property income will be restricted to 75% of finance costs, with 25% being available as a basic rate tax reduction,
- In 2018/19, 50% finance costs deduction and 50% being available for a basic rate tax reduction,
- In 2019/20, 25% finance costs deduction and 75% being available for a basic rate tax reduction,
- From 2020 to 2021 all financing costs incurred by a landlord will be available as a basic rate tax reduction.
Everyone is going to be affected differently by these changes. One of the key aspects to consider is how much mortgage you have, and by how much of your portfolio is borrowed money. Up until now, that landlord would have claimed relief on their mortgage interest rate. With these changes, landlords will be hit with a new 20% flat rate. Those paying basic rate will likely be unaffected, however, it would be worth talking to us to help you make the most of the options available to you.
Stamp Duty Tax
As of 1st April 2016 buying a second property means you have to pay an extra 3% Stamp Duty on top of the standard rates. This is charged by the following bands;
|Band||Standard 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%|
* Transactions under £40,000 not subject to the higher rates.
The higher rates apply to purchases of residential property in England, Wales and Northern Island. Landlords in Scotland are also paying a 3% tax, which brings the country in line with the UK.
These new changes are likely to affect everyone. The wider impact will ultimately be Higher rent, for the property manager the increased costs can be combatted by charging higher rent.
As Landlords what do you need to know?
As a landlord there are several things you need to be aware of such as the responsibility for;
- Fire Safety,
- Gas Safety,
- Electrical Safety,
- Repairs & Maintenance,
- Right to rent.
Each of these is the responsibility of the landlord. As a landlord, you are required to ensure these are all up to scratch these include ensuring all areas are accounted for, all gas appliances are checked over by a registered Gas safe engineer. Repairs and such are required by law to be carried out by qualified and registered tradesmen. As a landlord, if these precautions aren’t rectified then the tenant can ask the council to inspect the property under the Housing health and Safety act and take action accordingly.
The right to rent is a new act which makes it the legal responsibility of the landlord to check whether the tenant is legally allowed to rent in England, any landlord failing to do this can find themselves with a £3,000 fine.
As always when considering how these changes are going to affect you, it would be worth enlisting the help of A2O to help you get the best support available. We will be here to direct you to all the legal documents, discuss what’s best for your portfolio and how best to structure it, and finally to help you with your mortgage.