In this blog we will outline some of the tax implications that individuals who own a buy to let property, or are considering purchasing a buy to let property, should be aware of.
Changes to the level of interest relief available
- From the 6 April 2017 onwards, the level of interest that can be deducted from rental income received from the let of a residential property will be restricted, this measure will be introduced gradually over three years
- Finance costs include mortgage interest, any payments that are equivalent to interest, and incidental costs of obtaining finance, such as fees and commissions, legal expenses for negotiating drafting loan agreements or valuation fees required to provide security for a loan
- From the 2017/18 to 2019/20 tax year, landlords will be able to deduct a certain percentage of the total finance costs from the rental income received, the remainder of the finance costs will then be deducted as a tax credit from the overall tax liability. The specific percentages for each tax year are highlighted below:
- During the 2017/18 tax year the deduction from property income will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction
- During the 2018/19 tax year, the deduction from property income will be restricted to 50% of the finance costs, with the remaining 50% being given as a basic rate tax reduction
- During the 2019/20 tax year, the deduction from property income will be restricted to 25% of the finance costs, with the remaining 75% being 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
- The tax reduction works by taking the mortgage interest suffered during the tax year and multiplying it by 20%, this amount will then be deducted from your overall tax bill
- If your adjusted total income does not exceed the basic rate band (currently £32,500 for 2017/18, plus personal allowance of £11,500) you will not be affected by the changes
Replacement of Domestic items relief
- From April 2016, landlords will no longer be able automatically to deduct 10% of their rental profits as notional wear and tear. They will be able to claim tax relief only on costs they have incurred, such as if they have bought a new sofa or bed for the property
- Landlords will also have to start to keep receipts. Previously, landlords could write off the 10% even if they had not spent a single penny on repairs or replacements
Stamp Duty Land Tax
- Stamp duty land tax (SDLT) rates for buy to let and second properties changed on 1 April 2016, and now include a 3% additional surcharge on top of the normal SDLT rates
Capital Gains Tax (‘CGT’)
- CGT will be levied when you sell a property that is not your home
- If you have lived in the property for some time prior to it being let before you may be entitled to principle private residence relief and lettings relief. For this relief to be in point, you must have treated the property as your ‘only or main home’ for a period of time
- CGT has been increased for residential properties recently, and is now charged at either 18% or 28%
If you would like any further advice regarding buy to let properties, or any other assistance on tax matters, please do not hesitate to contact Amy Armitage (Tax Manager), John Neighbour (Tax Director) or any other member of the HB team on 01992 444466
