Private landlords should now be familiar with the changes to the taxation of residential property which have been taking effect over the last couple of years as part of the Government’s ‘crack-down’ aimed at buy-to-let (BTL) investors.
Following on from the last time I wrote, you may be aware that the final phase of the 4-year introduction of the restriction of mortgage interest relief ended on 5 April 2020. From the start of the new tax year, mortgage interest relief on residential property will be given at the basic rate tax only on the whole amount payable; from 6 April, no proportion of the interest will receive higher rate tax relief.
Private landlords not only have to deal with the Coronavirus lockdown, perhaps including pressure from their tenants for rent ‘holidays’ or rent reductions, but they are also feeling the impact of the other previously introduced measures designed to ease the property market for first time buyers and private owners.
And to add to their woes, for those landlords who have decided to sell their property investments, there are also significant changes to the reporting and payment of the capital gains tax liability… more on this later.
So, let’s summarise the taxation changes over the last few years, which ‘clamp-down’ on buy-to-let investors:
Mortgage Interest Tax Relief:
From 6 April 2020, tax relief on mortgage interest for residential properties will only be given at basic rate tax. This fundamental change has been phased in over 4 years; in 2017/18 25% of the mortgage interest being restricted to basic rate tax relief, moving to 50% and the 75% in 2018/19 and 2019/20 respectively.
This is a significant change, which is why it was introduced over a number of years to give landlords, who may have previously enjoyed tax relief at their marginal tax rate (up to 45%), the opportunity to review their arrangements. It has resulted in increased tax liabilities for higher and additional rate taxpayers, and those with high levels of borrowing. For example, in 2020/2021 a landlord paying basic rate tax in receipt of monthly rental income of £950, with mortgage interest of £600 per month, will have an annual tax liability of £840 (no different from the tax liability under the old rules). However, a landlord that is a higher rate taxpayer will have a tax liability of £3,120 (compared with £1,680 under the old rules) and for a landlord paying additional rate tax, the tax liability will be £3,690, compared to £1,890.
Stamp Duty Land Tax (SDLT):
From 1 April 2016, anyone buying a second or subsequent property that isn’t their main residence and costs over £40,000 (pretty much any BTL property!), has paid an additional 3% surcharge on top of the usual SDLT scale rates.
The SDLT must be paid within 30 days and a refund (within prescribed time limits) may be claimed if a new main residence was acquired before selling the previous one, providing it is sold within 3 years.
This additional stamp duty charge can eat into even long-term gains on property investments, with stamp duty on a £500,000 second property now costing £30,000 or 6%.
Wear and Tear Allowance:
This allowance, which was intended to cover the cost of providing furniture, white goods etc, was abolished a few years ago on 5 April 2016.
It previously enabled landlords with furnished property to claim a deduction from their taxable rental profits (broadly 10% of their gross rents, less some ‘standing’ charges). The landlords benefitted from this allowance whether or not any actual expenditure was incurred. In some cases, where rents were high, the allowance was overly generous and bore no relation to the actual expenditure incurred with some landlords providing minimal furniture (falling well short of providing fully furnished accommodation) to enable them to qualify for the wear and tear allowance.
Since 6 April 2016, landlords have had to actually incur the expenditure on replacements (not the initial purchase) of furniture etc to claim a tax deduction. Although, in some ways, it was a difficult to justify this rather generous historical allowance, the landlords must be missing this simple annual claim!
Capital Gains Tax:
Private landlords have now resigned themselves to the differential rates of capital gains tax (CGT), introduced in April 2016, that apply to residential property that isn’t covered by the taxpayer’s main residence exemption – from 18% instead of 10% (for basic rate tax payers) and 28% instead of 20% (for higher rate tax payers).
But, as alluded to in the introduction, other CGT changes apply from the start of the new tax year, 6 April 2020, which have a further impact on private landlords.
Anyone who sells a property on which CGT is payable (this will include buy-to-let properties as well as holiday homes etc) will be required to pay an estimate of the tax within 30 days of the sale completing – a huge reduction from the existing settlement period of between 10 and 22 months -with CGT liabilities being due for payment on the 31 January following the end of the relevant tax year.
The very helpful Private Lettings Relief – which allowed an additional CGT exemption of up to £40,0000 on a gain arising on the sale of a property which had been occupied as a tax-payers main residence but was also let. – will only apply for any period in which the owner has occupied the property at the same time as tenants (eg lodgers).
And lastly, the reduction of the final period of deemed main residence occupation. This is the final deemed period of exemption under the principal private residence relief – which can also be claimed by landlords selling a property they have previously used as their main residence – will also be reduced from 18 months to 9 months.
The Impact of the Changes.
As you will see, over the last few years, there have been a whole raft of changes introduced by the Government to promote private ownership and encourage first-time buyers by ‘clamping down’ on private landlords. Over same time, it has also introduced a number of positive measures to help those trying to get their foot on the property ladder – the carrot and the stick approach!
Last year, when I wrote this article, the view generally of relevant commentators was that these measures were beginning to have some effect. There was some evidence that the price increases of properties at the lower end of the market were slowing down and that there were more first-time buyer transactions. In addition, a Rightmove report said that approvals of new buy-to-to let mortgages were down 14% compared to the previous year, and 53% down on the three years before that.
However, the effect of these fiscal changes to the property market will pale into insignificance compared with the economic effect of Coronavirus, the associated lockdown, and future landscape. As I write, we are into week four of lockdown, and there is great uncertainty about how and when the lockdown will be lifted.
Under various Covid-19 measures, there has been a ban on evictions and many tenants will be requesting rental ‘holidays’, which will put private landlords under pressure and reduce their investment returns, making buy-to-lets less attractive. An article on the Landlord Today website estimates that Coronavirus could cost private landlords £14.9 billion in lost revenue.
However, prior to the pandemic, rents were on the increase, particularly in London, probably as a result of the fall in available properties to rent, following the success of the Governments fiscal deterrents to private landlords. There are also, apparently, no shortage of potential tenants. At the time of writing, Knight Frank, are feeling pretty upbeat about the market, although they accept that the usual July peak in the market will be pushed back to August, September or later.
“We’re preparing for a busier late summer period than normal,” says Gary Hall, head of lettings at Knight Frank. “The nature of the lettings market means it could explode quite quickly once restrictions are relaxed or lifted.”
David Mumby, Knight Frank’s head of central London lettings, agrees. “There’s no sense of a permanent withdrawal, no lack of demand. There’s a finite amount of stock available in the capital and both tenants and landlords are aware that if they don’t move quickly, they will miss out.”
There is no doubt that we are living in quite the most extraordinary and uncertain of times, and there can be no doubt that things will be different post pandemic – both economically and societally. Let’s hope that some of the changes are for the better.
At Paradigm Norton we have a multi-disciplinary team who can provide you with a holistic approach that combines accountancy and tax requirements with your financial planning. If you would like to speak to the team about the matters raised in this article please give us a call today on 01275 370670. We would love to hear from you.
This article has been published for educational purposes only and should not be considered investment advice or an offer of any product for sale and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. Your home may be repossessed if you do not keep up repayments on your mortgage. Paradigm Norton Financial Planning Limited is not a mortgage intermediary. Mortgage advice should be obtained from an independent mortgage adviser. The Financial Conduct Authority does not regulate tax planning and some forms of Buy-to-Let.