Tax changes for property landlords

Transcription

1 Small Business Accounts Support Tax changes for property landlords Recent budgets have seen several significant changes to the taxation of income from letting out residential property. These changes are likely to impact on the taxation of all current property landlords, as well as future decisions as to whether to remain or become a landlord. The changes are: - Tax relief for mortgage interest - Additional Stamp Duty on new purchases - The treatment or repairs and renewals - Rates of capital gains on sale Tax relief for Mortgage Interest incurred From April 2017, property landlords have received a reduced relief for interest incurred, affecting all those who pay tax at 40%/45%. In addition, some landlords, who were previously basic rate taxpayers, will find themselves paying 40% on their top slice of income, even where their cash income remains unchanged. The rules mean that some landlords could be paying out more after settling their tax bill, than the cash generated from your property. These changes are being phased in from 2017 and 2020 as follows: The rules up to March 2017 were: - Interest was deducted alongside other allowable costs from the rents received, to give a taxable profit (or loss). - The profit formed part of the landlord s income tax return. - Relief for the interest was effectively received at the landlord s highest tax rate ie. if they are a higher rate tax payer, the interest claim received tax relief at 40% Regime from April The profit from rental properties is calculated excluding interest. - This profit forms part of the tax return, and the landlord s tax liability is calculated. - Relief if given for the interest by way of a reduction to the calculated tax liability of 20% of the interest paid. The period between April 2017 and March 2020

2 - These changes are being phased in, meaning that the reduction in relief with be gradual. - Effectively, in each tax year between 2017/18 and 2020/21, the mortgage interest is treated: %age of interest treated under old rules %age of interest treated under new rules 2017/18 75% 25% 2018/19 50% 50% 2019/20 25% 75% 2020/21 -% 100% As a simple illustration of how this will impact landlords, we take the example of a working person with a single property which they let out: Our example Landlord receives 12,000 for the year in rent. They have no expenses other than mortgage interest of 10,000 on an interest only mortgage. In addition to being a landlord, their employment provides a gross income of 50,000pa. Under the rules to March 2017, the landlord s tax position was: Employment income 50,000 Rental income (12,000 less 10,000) 2,000 52,000 Less: Personal allowance (est.) (11,000) Taxable income 41,000 First 32,000 at 20% basic rate 6,400 Balance of 9,000 at 40% higher rate 3,600 TAX PAYABLE FOR THE YEAR 10,000 It can be said that the landlord s tax on his properties is 2,000 at 40%, being 800. Overall, after the payment of mortgage interest and tax the landlord is left with a cash surplus of 1,200. Under the rules from April 2020, the landlord s tax position would be (*): Employment income 50,000 Rental income (profit before relief for interest 12,000

3 62,000 Less: Personal allowance (*) (11,000) Taxable income 51,000 First 32,000 at 20% basic rate (*) 6,400 Balance of 19,000 at 40% higher rate 7,600 14,000 Relief for interest (10,000 at 20%) (2,000) TAX PAYABLE FOR THE YEAR 12,000 (*) Using 2016/17 tax rates and allowances for comparison purposes It can be said that the landlord s tax on his properties is 2,800, being 40% on his income of 12,000 (ie. 4,800), less the reduction in tax of 2,000. Overall, after the payment of mortgage interest and tax the landlord is left under the rules from April 2020 with a cash deficit of 800. This landlord will be out of pocket after paying tax, and so will many others!! It is important that all landlords have a clear understanding of how this change will impact on them. Please let us know if you d like an illustration of how these changes will impact on you. Our bespoke illustration will cost only 45 (incl. VAT), and can be deducted against your rental income for tax purposes. If you are considering changing your current property holding(s), or buying your first residential property to let out, please also contact our team to arrange a tailored review. (Please note that the changes to mortgage interest relief do not impact on UK Resident Companies, Non-UK Resident Companies, landlords of Furnished Holiday Lets) Rates of Capital Gains tax on property While not a change as such, the rates of Capital Gains Tax have been reduced to 10% (basic rate) and 20% (higher rate) for gains on assets except for residential property. The rates remain at 18% and 28% respectively for gains on the sale of residential property. Additional Stamp Duty Land Tax on second properties From April 2016, the purchase of a second home has been subject to Stamp Duty at 3% over the rates for residential property bought as a main residence for the owner. For property purchases by a syndicate, the additional rates of Stamp Duty apply in full, unless all of the members of the syndicate have no other interests in residential property including property outside the UK.

4 This is an additional cost of buying buy to let properties, which needs to be settled in cash at the time of purchase, so not only has a cost implication, but also a demand on cash flow. Your solicitor will handle the calculation and payment of Stamp Duty as part of the conveyance, however we are always happy to explain the potential costs if you are exploring purchasing any second property, so you can fully understand the cost involved.

5 Tax treatment of Repairs and Renewals From April 2016 a new relief for all residential property lettings came into effect under the banner of Replacement of Domestic Items relief, which replaces the wear and tear claim made on furnished lettings previously. The relief allows landlords to claim against their income for the replacement of certain domestic items which include: - Moveable furniture - Furnishings such as carpets, curtains and linen - Household appliances such as fridges and freezers - Kitchenware such as crockery and cutlery - Televisions In most cases relief will be for the cost of the replacement item, as landlords will replace an item like for like, and scrap the existing item. However, for each purchase the calculation is: Less Less Plus The cost of the replacement items The cost of any element of improvement over the item being replaced (beyond being the nearest modern equivalent) The proceeds received for the sale of the old item The costs of disposing of the old item - To claim against profits X While this is a relatively new concept within the rental property tax rules, the concept of nearest modern equivalent has been used elsewhere in tax for many years, so there are precedents which can be used to make a decision. As an example, if you consider where in the range of products the original item was (eg. Mid-range), then if the replacement is also mid-range, then that suggests a like for like replacement. To replace say a hand whisk with a electric mixer would clearly be an improvement, as the modern equivalent remains a hand whisk.