In recent years, the UK Government and Mr Osborne have been trying to encourage more first time buyers to step onto the property ladder. One of the main ways in which they are aiming to achieve this is to increase the supply of housing available.
The other is to also deter individuals from owning more than one property. In a bid to make owning a second property less attractive, there have been a number of key changes to the buy-to-let sector.
1. Mortgage Interest Relief Cap
Up until now, if you owned a buy-to-let property, HM Revenue and Customs (HMRC) allowed you as the taxpayer to deduct any mortgage interest suffered on that property in full (this is of course subject to certain limits).
The effect of this is that higher and additional rate would obtain 40% or 45% tax relief on the mortgage interest paid.
However, going forward, the amount of relief available on mortgage interest will be capped. Therefore, by 2020, the maximum relief that any taxpayer will receive on the mortgage interest will be 20%. However, to ensure that this doesn’t impact too heavily in one year, HMRC are going to phase in this mortgage interest relief cap over the next 4 tax years.
2. Wear and Tear Allowances
Up until recently, if you were to rent out a property fully furnished, you would be able to claim a wear and tear allowance against your rental profits (this being calculated as 10% of your gross rents less any utility / household bills paid for by you, the landlord).
However, from April 2016, this relief has been withdrawn and since been replaced with a relief that would enable all landlords to deduct the actual costs of replacing furnishings in the property.
It should be noted that initial costs of furnishing a property will still not be included as a revenue deduction for rental purposes.
A few examples of items that could be benefit from this replacement basis of relief are:
- Fridges and freezers;
- Beds and other furniture.
3. Additional Stamp Duty Land Tax
One of the biggest shake ups to the buy-to-let markets was the introduction of a new, higher rate of SDLT. This was introduced as of April 2016 and effectively targeted anyone who owned more than 1 property at midnight.
The current rates of SDLT start at 0% and can rise up to 12% on residential properties that are acquired for a value in excess of £1.5m. Although there are a number of different SDLT rates, recent changes to the SDLT legislation has meant that the amount payable was to be calculated on a ‘slice’ system (similar to that for income tax).
However, under the new rules, if an individual is to acquire a residential property, and at the end of the day of the transaction owns more than 1 property, then an additional 3% SDLT will be chargeable (on top of the rates mentioned above).
The only way in which this additional 3% SDLT charge is potentially avoided and mitigated, is if the new property acquired is to replace your previous main residence. There are also certain time frames which you would need to dispose of your previous main residence if you were unable to sell this prior to the purchase of your new home.
If you would like to find out more about the changes to the taxation of buy-to-let properties, or would like to discuss how you might have been affected by the recent changes, then please contact one of our tax specialists on 020 8429 9245 or contact us