Guide to buy-to-let tax changes
Since 1 April 2016 the government has added three percentage points to the existing Stamp Duty rates for those buying a second property – predominantly buy-to-let investors. It has significantly increased the amount of Stamp Duty that is payable and eroded the potential profits of an investment. For example, landlords who bought an investment property for £150,000 before 1st April paid £500 in Stamp Duty, but this rose to £5,000 after the deadline – a tenfold increase.
From April this year (2017) the government will gradually replace the ability to claim mortgage interest payments as an allowable expense with what is effectively a basic rate of tax credit on the total rental income that landlords pay. How it will effect landlords will differ massively depending on your circumstances, but as a rule of thumb higher and additional rate tax payers will suffer if they currently claim mortgage interest payments against their tax bill. That’s because under the current system they effectively claim interest payments at their marginal rate of tax but this will reduce to a basic tax rate by 2020/21. Landlords who have a low level of equity in their properties will be hit hard, while those without any mortgages won’t be affected at all.
Wear and tear allowance
Until April 2016, landlords with fully furnished properties could claim an annual wear and tear allowance of 10 per cent, whether or not they have had to make replacements to furnishings and fittings. If the amount they had to spend was more than 10 per cent they could claim the exact amount with receipts. But since 1 April 2016 landlords have only been able to claim the exact amount spent on furnishings and fittings.
What does this mean?
Frankly, if you are a buy-to-let landlord, or you want to become one, it has become more difficult to get the numbers to stack up. This has led to landlords looking at ways to mitigate the added tax expense.
Increasing rent or remortgaging to a new deal are both options, and there has been speculation about landlords buying properties through a limited company to try to shield their assets from the taxman.
In fact many lenders have reacted to this by launching more buy-to-let products for those who want to buy through a limited company structure, which in practice is referred to as a Special Purpose Vehicle (SPV) – a type of limited company that’s only business is buying residential property to let.
The Prudential Regulatory Authority has insisted that, since January 2017, lenders must look more closely at the minimum rental cover that they require in order to lend, especially since they are aware landlords will see their income squeezed. They need to be sure that the mortgage payments are affordable with a healthy margin on top, to cover the potentially higher tax demands.
Lenders are now obliged to ensure that rents cover 145% of the property’s rent, calculated at 5.5% interest, compared to the 125% cover formerly widely employed.