Property income, buy to let properties and recent changes
Jenny Manley - April 25th, 2016
The most recent Budgets and Statements appear to have attacked the Buy-to-let Investors and we have set out below some of the more salient points arising from these budgets.
Summer Budget 2015
Restricting finance cost relief for individual landlords
Currently, individual landlords can deduct their finance costs (such as mortgage interest) from their profits before they pay tax. “Wealthier” landlords therefore could receive tax relief at 40% and 45%.
Tax relief for finance costs on residential properties will be restricted to 20% for all individuals by April 2020. This restriction will be introduced gradually from April 2017.
Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at property profits or losses. They will instead receive a basic rate reduction from their Income Tax liability for their finance costs.
Landlords will be able to obtain relief as follows:-
- In 2017/18, the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction
- In 2018/19, 50% finance cost deduction and 50% given as a basic rate tax reduction
- In 2019/20, 25% finance cost deduction and 75% given as a basic rate tax reduction
- From 2020/21, all financing costs incurred by a landlord will be given as a basic rate tax reduction
As these finance costs will no longer be deducted from profits, but as a basic rate tax deduction from Income Tax liability, then it will also have an effect on individuals’ gross income and could restrict eligibility for personal allowances depending on the level of income.
Wear and tear allowance
From April 2016, the 10% “wear and tear allowance” available on fully furnished lettings will be removed. A new relief will allow all residential landlords (in respect of a fully furnished dwelling or not) to deduct the actual costs of replacing furnishings provided for the tenants use in the residential property.
The Government has increased the rent-a-room relief from £4,250 to £7,500 a year from April 2016. The value of this relief has been frozen since 1997 and this increase will allow individuals who rent a room in their main residence to do so tax free on income up to £7,500
Autumn Statement 2015
Stamp duty land tax; buying an additional residential property
The Government introduced higher rates of stamp duty land tax (SDLT) on purchases of additional residential properties of £40,000 or more from 1st April 2016. The higher rate is 3% above the current SDLT rates. As an example, a buy to let property purchased before 1st April 2016 for £170,000 would have cost £900 in SDLT but after the 1st April 2016, the cost of SDLT is £6,000.
Replacing your main residence
If you buy a new main residence after 1st April 2016, but the sale of your previous main residence is delayed, you’ll pay the higher rates as you own two properties.
However, you can claim a refund for this amount above the standard SDLT rates if you sell your previous main residence within three years. There are time limits to make this claim so it should be made as soon as possible.
More information can be found at www.gov.uk/stamp-duty-land-tax
Payment date on capital gains tax due on residential property
The Chancellor is proposing that the date for payment of Capital Gains Tax on residential property only will be cut from potentially between 10 – 22 months to only 30 days after the transaction and this is likely to become effective from April 2019.
This proposal brings the Capital Gains Tax payment date on residential property for UK resident taxpayers in line with the 30 days allowed for non UK resident individuals.
Spring Budget 2016
From April 2017, there is a new tax free £1,000 property allowance. The first £1,000 of income from property, such as renting a driveway or loft storage will be tax free and will no longer need to be declared.
Those with property income above this allowance will be able to calculate the taxable profit by either deducting expenses in the normal way or simply deducting the £1,000 allowance.
Capital gains tax on residential property
Capital Gains Tax rates were cut from 6th April 2016, but residential property will still be taxed as before. From April 2016, the higher rate of Capital Gains Tax reduces from 28% to 20% and the basic rate from 18% to 10%.
There will however be an additional 8% surcharge to be paid on residential property (this does not apply to your main home – only to additional properties) so effectively the Capital Gains Tax rate on buy to let property disposals will remain at the same rates as previously.