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How will the new Landlord Tax legislation affect you?

  21 Apr 2016

With the government actively targeting landlords and the buy to let market, it is fair to say that a range of changes introduced in the past year has caused many landlords to re-evaluate the industry and what is on offer to them. If you haven’t considered how the new landlord tax legislation will affect you, this guide will help.

The changes in taxation for landlords can be seen in three distinct steps:

  • An exclusion from the drop in capital gains rate
  • The 3% surcharge in stamp duty, from the 1st of April 2016
  • From April 2017, being unable to deduct interest payments from rental income before they calculate their tax bill

These three elements have combined to create a tax situation that has left many landlords wondering if there is anything to gain by remaining in the property investment industry.

The drop in capital gains rate, and the way that residential property has been excluded from the drop, is the latest change, announced in the March 2016 budget. The change will see the level of capital gains rate tax fall from 28% to 20% for higher rate tax payers and from 18% to 10% for basic rate tax payers.

It can be argued that as the capital gains tax isn’t changing for landlord or property investors, there is no real impact or effect on someone selling their property. However, when one area of the population receives a benefit and another group is excluded, it is only natural that the excluded group feels harshly treated.

Stamp duty changes will impact on landlords

With respect to the change in stamp duty, if you are currently a landlord and you don’t intend to add to your portfolio, there will be no impact on you. If you do intend to invest in property and you currently own property (anywhere in the world), you’ll find that the threshold now begins at £40,000 and there is an additional 3% to be paid.

Some comparisons between the stamp duty due to be paid by first time buyers and investors can be seen below:

  • For a £100,000 property, first time buyers pay £0 in stamp duty while investors will pay £3,000
  • For a £150,000 property, first time buyers pay £500 in stamp duty while investors will pay £5,000
  • For a £200,000 property, first time buyers pay £1,500 in stamp duty while investors will pay £7,500
  • For a £300,000 property, first time buyers pay £5,000 in stamp duty while investors will pay £14,000
  • For a £400,000 property, first time buyers pay £10,000 in stamp duty while investors will pay £22,000
  • For a £500,000 property, first time buyers pay £15,000 in stamp duty while investors will pay £30,000

With respect to the changes brought about by the changes with respect to mortgage interest relief, with tax being applied on turnover as opposed to profit, a lot of landlords believe they will be moved from the basic rate to the higher rate. A survey undertaken by the Residential Landlords Association reveals that over 60% of landlords believe they will be moved into the higher rate of tax.

At this point in time, landlords are able to claim up to 45% tax relief on monthly interest payments but this will be phased down to a maximum of 20%. Depending on the tax bracket a landlord currently finds themselves in, this may not present too many changes but as stated, some landlords paying the basic rate of tax expect to be moved into a higher rate due to these changes, which will see them doubly impacted by the changes which come into effect from April 2017.

Whenever any change or changes come into play of this nature, there will be people looking for loopholes or workable solutions to reduce the level of impact. While there is possible legal opposition being put up against the tax relief changes, a lot of focus is falling on landlords owning their properties through a company as opposed to under their own name. The incorporation process can help with respect to the drop in mortgage interest relief but there are set-up costs and different mortgage rates for company borrowers to contend with. This is a solution that may be of benefit to some investors, but it isn’t a universal solution that will benefit every landlord or property investor.


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