Tax Changes for Buy to Let Investors and Tenants

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May 23rd 2022
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Tax Changes for Buy to Let Investors and Tenants

The 2015 Summer Budget proposed taxation changes to tax reliefs. Coupled with earlier Stamp Duty changes we examine the effect on landlords and tenants.

Update - We have now produced a Buy to Let Tax Calculator to accompany this guide. You can now see the effects of the removal of wear and tear allowance and the upcoming changes to mortgage interest relief by using our online tool. The calculator will allow you to build up a property portfolio looking at costs, mortgage, rental income, purchases and sales and examine taxes including income tax and capital gains.

Over the last 18 months there have been a couple of proposed changes to property tax that may result in increased taxation on Buy to Let investors. With an estimated 15 percent of all new mortgages being for Buy to Let purposes this will make a large impact on both landlords as well as potential/existing tenants. It is expected that the increased cost of rentals will be passed on to tenants in the form of higher rental fees.

The details in this guide could change in a few weeks when the 2016 UK Budget is delivered but for now the known changes are:

  1. Stamp Duty

    From April 1st 2016 a 3 percent surcharge will be applied to Stamp Duty for properties classed as buy to let or second homes. Alongside the surcharge, a lower zero-band threshold will be introduced at £40,000. If you are a first-time buyer and rather than living at the first-time purchase you let it out, the surcharge/lower threshold will not apply. Parents purchasing property for children will also be stung by the surcharge/lower threshold, even on a joint mortgage but can avoid it by helping with deposits/become guarantors. Married couples/Civil partners will be treated as a single entity for Stamp Duty purposes so can avoid the surcharge/lower threshold when purchasing together.

    Stamp duty is now a progressive tax, which means the property price is apportioned through each band when calculating tax. The following tables show the rates/bands from April 2016:

    BandRate for first propertyRate for additional property
    less than £40k0%3%
    £40k - £125k0%3%
    £125k - £250k2%5%
    £250k - £925k5%8%
    £925k - £1.5m10%13%
    over £1.5m12%15%
  2. Tax Reliefs

    Landlords are able to deduct expenses relating to their rental portfolio when calculating the amount of tax to pay on rental profits. The lion's share of costs associated with rental properties in most cases is the interest payment made on the mortgage.

    The specific tax relief called 'Mortgage Interest Relief' was removed in the early 2000's for homeowners but has still applied to landlords, with basic rate landlords getting 20 pence off their tax bill for every £1 paid in mortgage interest. Higher rate landlords would claim 40 pence and top rate 45 pence.

    From April 2017, a phased-in restriction will be applied to how much mortgage interest can be claimed against when calculating tax on property rental profit. Over four years it is expected to be reduced to zero but the exact details are still in consultation and more will be divulged on March 16th at the 2016 UK Budget.

    It's not all bad for people looking to create an additional income through property. Landlords are currently able to deduct 10% of 'rental income' as wear and tear costs associated with property maintenance. This is regardless of whether any money was spent on maintenance or not. This allowance is to be updated from April 2016 to only allow deductions for costs incurred so the arbitrary 10% is removed allowing for higher costs to be claimable. The new replacement furniture relief will only apply to replacements however and not initial costs. It will allow tax relief on costs for replacing furniture, furnishings, kitchenware and appliances. This includes items such as televisions, beds, fridges and freezers. The relief will work much like the existing deductible expense for repairs.

    In addition, Rent-a-Room relief has been increased substantially from £4,250 to £7,500 starting April 2016. This allows people with a spare room to rent it out tax-free up to £7,500 of income.

So, the biggest initial shock to the rental market will be to new builds being added to rental portfolios where the investors have outlaid the higher stamp duty charges. All properties will be subject to the phasing out of tax reliefs on mortgage interest but as this will be phased in the initial impact may be more mild. We will have to wait and see but the market is already cautious with stocks in home building companies falling and concern for tenants in the news.

Catch up with a full breakdown of these changes as well as others announced in the 2016 UK Budget on Wednesday 16th March from 10:00am - we will be live tweeting and updating our blogs and calculators throughout the day. Follow us at our website and or Twitter @uktaxcalculator for updates using #Budget16.

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