Buy to let tax changes explained
So what is changing and when?
From 1 April 2016 the government proposes to add three percentage points to the existing Stamp Duty rates for those buying a second property. This is expected to be predominantly buy-to-let investors according to the government. It will make a significant difference to the amount of Stamp Duty that is payable and erode the potential profits of an investment. For example, landlords who buy an investment property for £150,000 before 1 April will pay £500 in Stamp Duty, but this will rise to £5,000 after the deadline – a tenfold increase.
From April 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
Landlords with fully furnished properties can currently 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 have had to spend is more than 10 per cent they can claim the exact amount with receipts. But from 1 April they will only be 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 will 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.
Aldermore Mortgages, a specialist lender with a wide range of buy-to-let products has recently announced that it will not charge a premium for mortgages bought via an SPV rather than personally. This is important because many lenders do charge higher interest rates for limited company buy-to-let deals, and some don’t lend to them at all. Whether other lenders will follow suit is yet to be seen, but given the demand from landlords to purchase through a limited company structure, increased competitiveness in this sector is likely.
Other lenders have looked 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.
For example, Barclays has announced it has increased its minimum rental cover to 135% of mortgage payments. TSB, The Mortgage Works, Paragon, BM Solutions and Godiva have all tightened criteria and now calculate rental cover at 125% at a rate of 5.5%, even if the actual pay rate is lower.