Novice property investors brace yourself, HMRC could easily trip you up.
I am making you aware of changes affecting landlords of residential property. The last year has seen a significant shift in the landscape for property investors, with the government announcing a number of measures seeking to make “buy-to-let” a less attractive opportunity for the novice investor. I have outlined the key changes below.
Restriction of tax relief on interest costs (residential property)
The most significant change is the restriction of higher-rate interest relief on residential properties. Currently, the full additional costs of financing the property (usually mortgage interest payments) can be deducted when calculating the profits of the rental business. From April 2017, tax relief on interest will be restricted so that taxpayers will only be able to claim tax relief at 20% by April 2020 (rather than the 40% or 45% relief currently available to higher-rate taxpayers). The restriction of tax relief will have the most significant impact on higher-rate taxpayers who have large mortgages or those with interest-only mortgages. In addition, rather than finance costs being deducted from rental profits (as they currently are), the tax liability in respect of rental profits will be reduced by 20% of the finance costs. The lack of deduction of interest costs at net income level may mean that some landlords find that HMRC’s calculation of their income for the tax year increases and they could find themselves liable for repayment of child tax credits or may have their personal allowance reduced in certain cases.
Removal of the Wear and Tear Allowance
From 6 April 2016, the Wear and Tear Allowance on furnished properties will be replaced by a new deduction for actual replacement expenditure. The new relief will be available to all residential landlords (including landlords of partly furnished or unfurnished properties) and will essentially allow relief for “like-for-like” replacements. This will negatively impact landlords of fully-furnished properties as the replacement relief is likely to be much less generous than the wear and tear allowance. However, it will be of benefit to landlords of unfurnished and partly furnished properties, who currently cannot claim any relief. In practical terms, it may be worth delaying any significantly expenditure on replacement items until after 6 April 2016 and make sure to retain all of your receipts
Rise in stamp duty for Buy To Let & Second Homes 2016
From 1 April 2016, there will be a surcharge of 3% on the stamp duty payable when purchasing a buy-to-let property or second/subsequent home in England and Wales. This represents a significant additional cost when purchasing a new property. The legislation is widely drawn, so it affects those buying a property to live in themselves but who are renting out their previous home. Overseas properties are also taken into account, so holiday home owners will be affected when buying a new house in the UK. In general, the climate is getting more difficult for buy-to-let investors, with the Bank of England now consulting on whether to set limits on buy-to-let loan-to-value ratios and the ratio of rental income to mortgage interest payments.
|Brackets||Standard rate||Buy-to-let/second home rate (April 2016)|
|Up to £125,000||0%||3%|
|£125,001 – £250,000||2%||5%|
|£250,001 – £925,000||5%||8%|
|£925,001 – £1.5m||10%||13%|