TACKLING TAX If you’re a residential landlord, you could be forgiven for feeling targeted by the Government. Many private landlords provide much needed, good quality accommodation, after all, not everybody has the ability, or indeed the desire to own their own home, but recently introduced legislation is clearly aimed at reducing the size of the previously expanding private rental sector.
S ince April 2016 we have seen the introduction of an additional 3% Stamp Duty Land Tax on ‘second homes’, the removal of the 10% Wear and Tear Allowance for furnished rental properties, and whilst the disposal of most other assets will qualify for the new reduced rates of Capital Gains Tax (CGT) at 10% or 20%, gains on the sale of residential property are still subject to rates of 18% for gains falling into the basic rate tax band, and 28% for gains above this. From April 2019, there will also be a requirement for CGT on residential property disposals to be paid within 30 days. With careful planning, patience, and the use of certain tax favoured investments, it is possible to reduce the rates of CGT on residential property gains back to the lower rates of 10% and 20%, but these changes are still clearly an attack against investors who prefer to put their money into bricks and mortar when the Government would clearly prefer investment into UK trading businesses.
Additional taxes at the point of acquisition and sale however are one thing, but the fundamental change to the way in which tax relief on interest charges will be given to property businesses from 6 April 2017 could mean a significant increase in the tax bill of many landlords who have borrowed to fund their portfolios. Prior to 5 April 2017, relief for interest expenses, was given at the landlord’s marginal rate of tax, therefore a 40% taxpayer, received relief for any mortgage interest at 40%. This was achieved by allowing a deduction for the mortgage interest against the rental income. From 6 April 2017 however, changes will be phased in over a 4 year period limiting the amount of mortgage interest which can be deducted in this way. In the 2017/18 tax year, 75% of the mortgage interest can be deducted against the rental income, and the remaining 25% will be given as a ‘tax reducer’ at a flat rate of 20%. Over the following 3 years, the amount of interest deductible against rental profits decreases, whilst the amount relieved as a tax reducer increases so that by the time we reach 2020/21, all of the mortgage interest will be relieved at just 20%.
Those likely to be most affected by these changes are landlords who are not basic rate taxpayers, and who have borrowed to fund their property purchases. Of course the higher the borrowing, the greater the effect these changes will have. Although it may appear that there is no light at the end of the tunnel, there is still much planning that can be done. At Scrutton Bland, our property taxation professionals are committed to helping our clients make the best of this changing landscape and to providing advice to minimise the impact these changes will have. To speak to someone about your buy to let portfolio please contact Faye Howard at faye.howard@ scruttonbland.co.uk or 01473 267000 .
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