Residential Buy-to-let Tax Changes Should Make Investors Think Twice

Posted by siteadmin on Monday 29th of February 2016.

The Chancellor has targeted landlords and second-home owners with his recent changes:

  1. A dramatic reduction in tax relief on the interest on mortgages and other property-related debt will be phased in over four years, starting in 2017.
  2. Stamp Duty Land Tax will increase this April.
  3. The wear and tear allowance will only be awardable against actual expenditure.

Scottsdale MoneyWISE’s advisers suspect that this could be the thin end of the wedge, and can provide professional advice to landlords and investors.

There’s no escaping the rise in landlords’ taxation, however, so if you are purely treating new purchases as investments, perhaps it’s time to think again.

Buy-to-lets have served investors well in the past, but this doesn’t look as attractive as other options going forward. We’re advising many of our clients who were planning to invest in property – post-April 2016 – to look at a wider investment portfolio to improve potential returns. Please contact us to arrange to discuss this with an adviser if this applies to you.

Some industry pundits have raised the idea of setting up a company to improve tax relief on buy-to-lets, but we think this advice could lead many landlords to make poor decisions. In reality, the majority of landlords do not have a large enough residential property portfolio to justify the cost of running a company. We have worked out a set of typical company running costs and, when you do the maths, it simply doesn’t add up as a sensible option for many.

If you’re unaware of what the Chancellor intends to do, here’s an outline:

Tax relief changes on mortgage and other loan interest rates
Over four years, starting on 6 April 2017, the tax relief that landlords receive on the mortgage, and other related loan interest they pay, will be gradually reduced from 100% to 20%.

At present landlords can offset their full buy-to-let finance costs, including those associated with content and refurbishment, against their rental income, which is a marvellous tax relief for those in higher income tax brackets.

In 2017, only 75% of finance costs will receive full income tax relief – the remaining 25% will be taxed at 20%. On 6 April 2018 the percentage of finance costs that can counteract tax will fall by another 25%, and so on until on 6 April 2021 when only 20% of income tax relief will be available against all finance costs.

Stamp Duty and Land Tax increase
There’s a sharp rise in residential buy-to-let and second-home Stamp Duty Land Tax (SDLT) from April 2016, although this is deductible against Capital Gains Tax if the property is later sold.

The current SDLT is chargeable at 2% from £125,000–£250,000 of a property’s purchase price (the first £125,000 is currently tax-free) – just as if you were buying a property for you to live in.

From April 2016, landlords face the higher  SDLT charges listed below. It’s important to understand that these don’t apply to resident homeowners.

£125,001–250,000   5%

£250,001–925,000   8%

£952,001–1.5 million   13%

>£1.5 million   15%

The wear and tear allowance is disappearing
At the moment, 10% of rental profits are written off as wear and tear, regardless of whether or not repairs or refurbishment have taken place. From April 2016, landlords will only be able to deduct what they’ve actually spent.

The value of the investment and the income they produce can go down as well as up and you may not get back as much as you put in.