Date posted: 12th Oct 2018
The current tax position is complex and will depend on your specific circumstances, however, there are options to mitigate your tax liability if you get professional advice and support.
Over recent years the Government has implemented a series of targeted tax changes with the intention of increasing the tax burden for ‘Buy – to – Let landlords’. The given purpose for this is to discourage multiple home ownership which should, in turn, create a more accessible environment for first time buyers.
Current reports indicate that growth in the rental market has slowed although this can’t be solely attributed to the tax changes. Property prices remain high, mortgage regulations are being tightened and rental stock is low which can all impact the decision to rent or buy property.
Phased reduction of Mortgage Interest Relief (“MIR”) is one of the most stringent measures imposed.
From April 2017, Buy-to-Let investors began to lose the ability to deduct mortgage interest from their property profits when calculating tax liability. They could previously offset 100% of the mortgage interest against the rental income. The phased restriction however saw the deductible amount reduced to 50% for the 2018/2019 tax year, reaching 0% by 2020. Instead relief for the mortgage interest is given by bringing in a 20% tax credit (20% of the interest paid) against an individual’s tax liability.
Therefore, where this measure is applicable, more and more of a landlord’s income and profits will become taxable, resulting in increased tax liabilities.
It’s worth bearing in mind that the cuts to MIR do not apply to limited companies. Limited companies also enjoy lower rates of taxation, so this may potentially offer a route for landlords to operate their property business from a corporate entity.
Where residential property transactions involve a sale or transfer of the property, a higher rate of Capital Gains Tax (CGT) must also be paid (18/28%) as opposed to the standard rates of 10/20%. From April 2020 landlords will also have less time to pay the CGT relating to the sale of property. They will be required to make a payment on account for the tax within just 30 days of the sale.
Lastly, there is Replacement Relief which was introduced in April 2016. This replaces the Wear and Tear Allowance. Previously, the Wear and Tear Allowance enabled landlords to make a 10% deduction of net rent from profits to cover wear and tear in furnished properties. The new relief is significantly more restrictive as it only allows landlords to make deductions for costs incurred when replacing furnishings or furniture.
What you need to consider for the future.
We are a regional firm of chartered accountants and business advisers with an experienced tax team of 3 tax partners and 8 advisers, seven of whom are CTA qualified. We have noticed a rise in Buy-to-Let investors seeking our advice to ensure that their businesses remain viable and that their business assets and income are properly protected.
If you have any queries relating to your tax position as a Buy-to-Let Landlord, or maybe have clients or contacts who need specialist advice, please don’t hesitate to contact us.