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. Are BTL properties still popular following the changes to the taxation of rental income? And what has been the impact of these changes, so far? Let’s start with a reminder of changes which were introduced with the intention of helping first time buyers and concentrated on four main areas.
Anyone buying a second or subsequent property that isn’t their main residence and costs over £40,000 (pretty much any BTL property!) will pay an additional 3% stamp duty surcharge on top of the usual scale rates. The stamp duty must be paid within 30 days and a refund (within prescribed time limits) can be claimed if a new main residence is 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%.
Mortgage Interest Tax Relief:
From April 2020, tax relief on mortgage interest will be given at the basic rate tax only. This fundamental change is being phased in over 4 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. 2017/18 was the first year of the introduction of the changes; with 25% of the mortgage interest being restricted to basic rate tax relief. For the current (2018/19) tax year, the basic rate tax restriction is increased to 50%. It will be 75% for 2019/20 and from 6 April 2020, all the interest will be restricted.
This is a significant change, resulting 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 a 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.
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 will now have to have actually incur the expenditure on replacements (not the initial purchase) of furniture etc to claim a tax deduction.
Capital Gains Tax:
In a surprise announcement in the 2017 Autumn Statement, the then Chancellor, George Osborne, reduced capital gains tax rates from 18% (for basic rate tax payers) and 28% (for higher rate tax payers) to 10% and 20% respectively. But as a ‘twist in the tail’, the capital gains tax rates applying to properties not qualifying as the taxpayer’s main residence remain at the 18% and 28% tax rates.
The Impact of the Changes.
These changes were introduced at a time when investing in BTL property was increasingly popular; with many seeing this as an attractive investment at a time of low interest rates and volatile stock markets. In addition, there was a new generation of ‘silver landlords’, taking advantage of the relaxation of the rules to use their pension pots to invest in BTL properties. Consequently, first time buyers were losing out to the increased numbers of private landlords, and the intention was that these new measures would slow the BTL market and give first time buyers a much-needed helping hand – ultimately rebalancing the housing market.
There currently seems to be a general feeling in the industry that the tax changes or ‘crackdown’ on the BTL investors is having the desired effect – giving renewed hope to first-time buyers; with some evidence that price increases on properties at the lower end of the market are slowing down and that there are more first-time buyer transactions.
In a report issued towards the end of last year, Rightmove, said that mortgage approvals for new BTL purchases were 14% down compared to the previous year and 53% down on three years ago. A Rightmove spokesman said that ‘Landlords are clearly buying far fewer properties and that leaves a gap in the market for first-time buyers’.
Fortunately, this appears to have been achieved without the crippling increase in private rents due to supply shortages, which were predicted by some when the taxation changes were announced. This is a further help for those currently renting but trying to save for a deposit.
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.
RMT ref: 246/03/19/LH