Tax relief previously available for mortgage interest costs will soon be restricted to the basic rate of income tax (20%). All landlords currently utilising the ability to offset mortgage interest costs will be affected but higher and additional-rate taxpayers with mortgage costs exceeding 75% of rental income will be most severely impacted.
These rules were announced in 2016 and came into force in April 17 and will be phased in over three years. Mortgage interest relief will be restricted as follows:
By 25% for the tax year ended 5th April 2018, with 75% allowed in full under the old rules
50% for the tax year ended 5th April 2019, with 50% allowed in full under the old rules
By 75% for the tax year ended 5th April 2020, with 25% allowed in full under the old rules
0% from tax year commencing 6th April 2020
Where it was previously possible to deduct mortgage interest costs from rental income received before calculating taxable profits, it will no longer be possible to deduct any finance costs from April 2020. A tax credit of 20% of mortgage interest finance costs can instead be taken against the tax liability for the year.
Due to the change in determining profits the increase in taxable rental has the potential to push lower rate income tax payers into the higher tax bracket. Limited companies are not affected by the changes making the incorporation of buy to let portfolios increasingly popular. It is however important to note that the transfer of any property from private ownership to a Limited Company is classed as a sale at market value and likely to incur a Capital Gains Tax and Stamp Duty Land Tax liabilities.
Stamp duty – Second Home and Investment Purchases
Stamp Duty Land Tax is a ‘lump sum’ progressive tax paid when purchasing a freehold, leasehold or shared ownership residential property in England, Northern Ireland and Wales
From April 2016 the stamp duty liability for investment and second home purchasers increased by a sur charge of 3%
On an example purchase at £250,000 the effective rate payable by an owner occupier is 1% creating a liability of £2,500
For the same purchase a second home or investor buyer would pay an effective rate of 4% creating a liability of £10,000
On an example purchase at £500,000 the effective rate payable by an owner occupier is 3% creating a liability of £15,000
For the same purchase a second home or investor buyer would pay an effective rate of 6% creating a liability of £30,000
These rules are very complex and again, do not necessarily apply to companies who are charged to Stamp Duty Land Tax under separate rules.
Wear and tear allowance – 10% allowance replacement
From April 2016 it is no longer possible to deduct 10% of rental profits as wear and tear. Instead, with proof of purchase receipts or invoices, it is now possible to deduct actual costs incurred in repair, maintenance or replacement although the cost of initial provision is not allowable under the new rules.
It remains possible to offset allowable expenses from rental income. These include letting agent’s fees, insurances, professional fees, service charges and deposit and safety certification charges. For owner occupiers intending to rent out their former homes it is possible to offset repair and maintenance expenses within a period of seven years prior to the initial letting if it can be proved these are for the purpose of preparing to let.
If you have been considering furnishing or refurbishing your investment property to enhance income and increase letting appeal, the ability to offset the additional expense should determine that now is the time to act! For more information on upgrading your service to full property management or to discuss scottfraser’s furnishing, design, refurbishment and acquisition services, please do not hesitate to contact John Gebbels, Associate Director, 01865 760055, firstname.lastname@example.org