The past year has seen a number of announcements changing the way in which landlords are taxed on their property income. In particular, the letting of residential property will be adversely affected and George Osborne’s announcements are making him look like “the big bad wolf”.
Restriction on mortgage interest from April 2017
Perhaps the biggest change is to the way landlords claim tax relief on mortgage interest. I first covered this change in July last year, following the Summer Budget in which it was announced, but I am finding that awareness of it, and how much damage it can do, is still not widely known.
In brief, mortgage interest paid on a property letting can currently be claimed as an expense against rents received. This effectively gives relief for the interest paid at the marginal rate of tax, which can be as high as 45%.
The restriction, being introduced gradually over four years, will mean that by the 2020/21 tax year, relief can only be claimed at the 20% basic rate of tax for residential lettings.
This will result in significantly more tax being paid by some landlords. We are already seeing examples where landlords will have a tax bill larger than their net profit – an outcome which should raise serious questions about what to do with the property letting going forward.
Landlords who are basic rate taxpayers would be forgiven for thinking that this change will have no impact on them, but that is not necessarily the case. The way relief will be given could mean that their total income falls into a higher tax bracket!
It is worth remembering that this change does not impact on commercial property or furnished holiday lettings, nor does it apply to companies that let residential property.
Stamp Duty Land Tax increase
The amount of SDLT payable when purchasing a residential property as a second home or “buy-to-let” will be increased by 3% on top of the existing rates for purchases made from 1 April 2016.
Frustratingly, we do not have the draft legislation to confirm exactly how it will work, and we may not see any until a few working days before the change takes effect.
What we have seen is the HMRC proposal on how they think it will operate. The rules look incredibly complicated, particularly where property is being purchased jointly, and where there is a delay between purchasing a new home and selling your old one.
Unlike the mortgage interest change, companies will be caught by the 3% increase, together with individuals. It will also apply to the purchase of furnished holiday lettings.
There is a suggested exemption for “large scale investors” from the 3% increase but at this stage we do not know who will be able to claim it and how exactly it will work.
Quarterly tax returns?
Finally, HMRC are suggesting that by 2019 most landlords will need to start submitting details of their income and expenses online every three months as part of the regime to “make tax digital”.
At this stage, this is merely a proposal by HMRC and we will have to wait and see how it pans out as part of their overall project to move tax online.
These changes will make the buy-to-let market less attractive, although I’m not sure it will have the impact on the first-time-buyer market George Osborne is hoping for. It is a good reminder to review your property letting business now though, to stop the taxman huffing and puffing, and blowing your house down!
If you would like to know more about this or any other aspect of your tax affairs then please speak to one of our specialist personal tax team.