Buy-to-let tax increase for landlords

The past few years have been progressively more difficult for landlords, as the government has sought to crack down on what it sees as the inflated private rental sector. Since the most recent budget, the buy-to-let tax increase for landlords is a hot topic and is becoming increasingly more complicated…

Increased tax for landlords

In this blog post I’m looking at the latest legislation affecting rentals, whether a buy-to-let investor, property dealer or developer.

Firstly, let’s reassure landlords and tenants that buy to let is not dead. Although the government and some tenant groups may favour the reduction in individual rentors (and favour institutional buy to rent groups), there is a supply and demand issue that won’t be solved easily. There’s still an expected growth in the private rental sector that is projected to grow for the next four years (Knight Frank’s ‘Multihousing 2017 PRS research report’).

Although the legislation and landlord tax liabilities have changed, as well as less recent rise in stamp duty, buy to let can still offer favourable returns for landlords. This is most notable if they are investing with cash, or have been investing for a while and have already made some money, but other opportunities still exist. Either way, it’s important to be aware of the changes and personal implications before making any hasty decisions to buy, or to sell existing rental properties.

Mortgage relief changes

Landlords, their accountants and letting agents, if appropriate, must be aware of the impact of new legislation, particularly mortgage relief changes. They should then work at developing a plan to mitigate these risks.

The main changes affecting landlords are:

  • 3 percent stamp duty surcharge on investment property (2016 change)
  • Removal of the 10 percent ‘wear and tear’ flat allowance
  • Tax relief on mortgage interest is being phased out (between now and 2020).
  • Capital Gains Tax due within 30 days of sale (from 2019).

Specialist advice would be wise during this time of change, as keeping up to speed with the rules and personal implications can be complicated. Higher rate and additional rate taxpayers will be hit particularly hard, whereas the loss of tax relief may also push lower-rate taxpayers up into the higher tax band.  It is expected that many, many private landlords will lose out.

Mitigating the risk

For new investors, buying cash and reducing the debt is the first step to reducing their tax liability. Cash buyers simply won’t be affected in the same way as mortgaged landlords. Alternatively, buying property through a resident company, where profits are subject to corporation tax (and not personal income tax), is an option. Again, specialist advice should be sought here as this can be complicated to set up and manage, but will prove a good option for some. Finally, remembering that, of course, capital gains tax may rule out any savings (or be even more of a tax burden), so examining future risk is also wise for any property.

It’s advisable to work with a financial advisor who specialises in landlord and property tax, to ensure that you are meeting the most recent rules and legislation – however few or many properties you may own.

For further information on the latest property tax rules, changes to landlord tax, or property rental accounting, get in touch today. We will help you review your personal tax liability to make the most of your allowance and any other opportunities you may have.

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