April 2020 will see the final changes to the taxation treatment of buy-to-let properties which have been brought in over the last 3 years. From April 2020, non-corporate landlords will no longer be able to offset mortgage interest payments against rental income. Instead the entire amount of the interest payment will qualify for only 20% tax relief.
This means that landlords getting £10,000.00 in rent and paying £9,000.00 in mortgage interest payments will end up paying tax on the full £10,000.00 – though the amount will still depend on their personal tax bracket.
They will then be able to deduct £1,800.00 (£9,000.00 x 20%) from their tax bill due to the 20% tax credit, leaving them with a significantly increased tax bill on their rental income.
Based on the above example, a tax-payer with a marginal rate of 40% will have a tax bill of £2,200.00 compared with £400.00 before the changes, and someone with a marginal tax rate of 45% will have a tax bill of £2,700.00 compared with £450.00 previously.
There remain tax benefits if rental properties are owned in a company, but the set-up costs and administrative costs are only likely to be worthwhile if the landlord has a portfolio of properties. For individual landlords with one or two properties this is unlikely to be a worthwhile option.
The changes to Stamp Duty Land Tax since 2016 have also been prohibitive, as there is now 3% additional Stamp Duty Land Tax on purchases. On a £300,000.00 purchase, the landlord would pay £14,000.00 Stamp Duty Land Tax compared with £5,000.00 for a buyer without any other property.
The ‘wear and tear’ allowance has also been substantially reduced so that the ability to automatically deduct 10% of net rent from their profits to cover wear and tear has gone so that a landlord can only claim tax relief for items they actually purchase for the property.
New rules also mean that letting agents engaged by landlords can no longer pass on letting fees to tenants meaning that landlords will have to bear those fees.
Holding deposits, that is to say an amount paid to a letting agent to ‘reserve’ the property for the tenant, have been limited to 1 week’s rent. If the letting proceeds, then credit must be given for that holding deposit against any other deposit taken. The standard deposit taken by landlords to be held during the course of the tenancy has also been capped at 5 weeks’ rent if the annual rental for the property is less than £50,000.00. It increases to 6 weeks’ rent if the rental is more than £50,000.00.
Finally, the allowances available to landlords when they come to sell the property will also be substantially reduced from April 2020. See our article from 2 September 2019 https://www.powellslaw.com/2018/11/06/former-homes-capital-gains-tax/ .
If you own a buy-to-let property and intend to sell there is a small window of opportunity before April 2020 to benefit from the existing rules on Capital Gains.
If you would like any advice in relation to the matters raised in this article or relating to buy-to-let or furnished holiday lettings please contact Glyn Evans on 1934 637911 or email firstname.lastname@example.org