Property Tax is Getting to Be Taxing for Landlords
While the general rule regarding the law and tax in particular is that ignorance is no excuse, it’s easy to see why many buy-to-let landlords have been left confused and concerned over a flurry of recent tax changes. Here is a brief explanation of the three key changes and what they mean.
Stamp duty surcharge
In England, Wales and NI, anyone purchasing a second residential property priced at £40K or more pays a 3% stamp duty surcharge. The Scottish equivalent of stamp duty is Land and Buildings Transaction Tax and the Scottish government has chosen to implement the 3% surcharge in the same way as in the rest of the UK. It should, however, be noted that the valuation bands for LBTT are different from the stamp duty bands which apply in the rest of the UK. People who meet certain criteria (e.g. who sell their first property within a certain period of time) may be eligible for a refund of the surcharge, but BTL landlords are highly unlikely to qualify.
Mortgage interest tax relief
Starting April 2017 there will be a phased transition from the current method of calculating both the profit on rental property and the amount of tax relief granted on finance costs such as mortgage interest. This transition phase is due to last four years and for the sake of simplicity, the following explanation will compare the current situation with the situation after the transition period.
Landlord X lets out a property for £10K a year. They spend £1KPA on maintenance and repairs and pay mortgage interest of £4KPA. At current time their profit is considered to be £5KPA but after the transition it will be £9KPA.
Landlord X also has a job, for which they receive a gross salary of £20,600 and pay tax and NI through PAYE. As at April 2016, their tax calculation is as follows.
Income = £20.6K + £5K
Personal allowance = £10.6K
Tax liability = £15K*0.20 = £3K of which £2K has already been paid through PAYE
Assuming the income tax allowances and bands stay the same after the transition. The calculation will then be as follows:
Income = £20.6K + £9K
Personal allowance = £10.6K
Tax liability = £19K*0.20 = £3.8K of which £2K has already been paid through PAYE
Less mortgage interest tax adjustment of £4K*0.2=£0.8K
The mortgage interest tax adjustment is the lower of:
Mortgage interest and finance costs not deducted from income
Profits less any losses brought forward
Total income (less savings and dividend income) exceeding the personal allowance
In this example, the landlord was clearly in the basic rate band, even accounting for the change to the way rental profit is calculated, and hence was unaffected, however some landlords may find than the changes push them up an income tax band and landlords who are already in the higher/additional bands will essentially be faced with a higher tax bill.
Wear and tear allowance
As of April 2016, landlords now have to claim for replacement of furnishings on an itemised basis rather than receiving an automatic allowance of 10% of the net rental income (which is rent minus any expenses paid by the landlord on behalf of the tenant such as council tax and utilities).
For more information on selling your home or getting an online valuation, please contact Property Cash Buyers.