In the 2015 Summer Budget, the government started to introduce a series of measures which together have had a very adverse effect on the tax position of residential landlords. Suddenly your property portfolio may not look so shiny.
These three major changes will come as a particular blow for individuals with considerable property portfolios. It may be time to consider an alternative structure.
Wear & Tear Allowance
Until 5 April, you could claim a tax deduction of 10% of the gross rents when letting fully furnished residential property. This covered the wear and tear of items such as furniture, white goods, carpets and curtains. Actual expenditure on these items was not deductible.
The wear and tear allowance ceased from 6 April. Instead, a deduction can be claimed for expenditure actually incurred in replacing furniture items.
Mortgage Interest Relief
Until 5 April 2017, you can still deduct the amount of mortgage interest you have paid on your let properties against your rental income. Relief is therefore given in full at your marginal rate (20% for basic rate taxpayers, 40% for higher rate taxpayers and 45% for additional rate taxpayers). Over the next three tax years, this relief with be reduced to basic rate relief as follows:
|% of interest relievable at marginal rate
|% of interest relievable at basic rate
From 2020/21, relief will only be available at basic rate. For basic rate taxpayers there will be no change; however, for higher and additional rate taxpayers this will effectively mean you have a further 20% or 25% charge on mortgage interest paid. Where rental yields are low, particularly in London and the South East, this could even result in a net cash loss. Where property businesses are highly geared, this could also affect profitability significantly.
There are a few tax planning measures to consider:
- Switch to shorter-term fixed rate deals to get lower rates of interest;
- Place your property portfolio in a limited company structure. Corporation Tax is lower, but mortgage options are limited and there are other tax issues to consider;
- If your spouse pays a lower rate of tax, you could transfer ownership of one or more properties to them (taking care this does not lift them into a higher tax band).
The changes to the interest rules do not apply to qualifying furnished holiday lettings businesses, where full interest relief will still be available.
Stamp Duty Land Tax (SDLT)
From April, buy-to-let landlords have been hit with an extra 3% charge on each SDLT rate band, which vary by property value. In fact anyone buying an additional residential property, except where they are replacing their main residence, is likely to be affected.
The proposed higher rates will be three percentage points above the current residential rates, including the 0% band. Married couples and civil partners living together will be treated as one unit. This means that any homes owned by either partner will be included when the SDLT bill comes due on the purchase of another property.
Parents keen to help their children onto the property ladder could be hit with additional SDLT if they buy a home for them to live in or buy in joint names, The only way round this would be to buy the home in the child’s name outright but maybe with a formal loan from you so that you have influence if you wish.
Caravans, houseboats and mobile homes are not subject to the new higher rates of SDLT.
Capital Gains Tax (CGT)
Whilst generally CGT rates have reduced to 10% (from 18%) for basic rate taxpayers and to 20% (from 28%) for higher rate taxpayers, the rates have not been reduced for applicable residential property disposals.