Significant tax changes are on the way for anyone buying a second home or a buy-to-let property in England & Wales. The Scottish and Northern Irish Governments have also unanimously backed the changes, which will come into effect from 1 April 2016.
Robert Jamieson TEP explained the new changes in a STEP seminar for tax planning for businesses held in London on 22 February.
Under the current rules, you are entitled to claim all of the mortgage interest that you pay against the income of your buy-to-let property, and then only pay tax on the remainder, whether it is the basic rate of 20 per cent or the higher rates of 40 per cent and 45 per cent. Other valid expenses can also be deducted before the tax is payable.
However, from next year the calculation of the tax relief is going to be greatly reduced to a flat rate of 20 per cent on the whole income of the property. This will be slowly phased in from 2017 and by 2021 the rules will be fully enforceable. Landlords who pay the basic rate of 20 per cent will see no change, whereas the higher rate tax payers of 40 per cent or 45 per cent will lose 50 per cent or more on their tax relief. These rules do not apply to owners of furnished holiday accommodation or to landlords of rented commercial property (S24 F(No2)A 2015).
From 1 April 2016, higher rates of Stamp Duty Land Tax (SDLT) are also being introduced resulting in an additional 3 per cent on top of the fixed 2014 rates which will be charged on the purchase of both second homes and buy-to-let properties. The Chancellor George Osborne quoted ‘People buying a home to let should not be squeezing out families who can’t afford a home to buy. So I am introducing new rates of stamp duty that will be 3 per cent higher on the purchase of additional properties like buy to lets and second homes.’
This increase significantly inflates the stamp duty tax on a GBP275,000 buy-to-let purchase from GBP3,750 to GBP12,000.
The Chancellor has also proposed that from April 2016, ‘wear and tear’ costs will only cover furnishings that have actually been replaced or repairs that have been carried out, with receipts to evidence the expenditure. The current rules are that landlords are given a wear and tear allowance regardless of how much of it they actually use.
These imminent reforms are making it far less attractive for individuals – or financial entities – to invest in second homes and buy-to-let properties. There are, however, two ways in which these charges can be mitigated by using S116(7) FA 2003 ‘multiple dwellings relief’, or the more complicated partnership or LLP arrangement set out in Schedule 15 FA 2003.
Nonetheless, the new rules will disincentivise most landlords from investing further in a rental portfolio when the scope for profit has been cut so significantly.