Buy-to-let tax changes and you
For nearly twenty years, buy-to-let has been one of the most popular investments for British people looking for a return in an era of unprecedented low interest rates.
Buy-to-let tax changes – stamp duty land tax
| Band | Normal Rate | Additional Property |
|---|---|---|
| £0-£39,999 | 0% | 0% |
| £40,000-£124,999 | 0% | 3% |
| £125,000-£249,999 | 2% | 5% |
| £250,000-£924,999 | 5% | 8% |
| £925,000-£1,499,999 | 10% | 13% |
| £1,500,000 and above | 12% | 15% |
Stamp duty is the tax that you pay to government every time you purchase a property that qualifies for it.
From April 2016, different stamp duty regimes were put into place depending on whether you were buying a house that was your primary and only residence or you were purchasing property as either a second home or with the intention of letting it out.
If you were to buy a house for £225,000 and it was the only property you owned, you would pay no duty on the first £125,000 of the purchase price. You’d then pay 2% on the amount between £125,000 and £225,000. Your total stamp duty land tax would be £2,000.
Things change if it’s not your only property. Let’s take the same house as an example. You’d pay 3% on the first £125,000 (£3,750) and 3% on the amount between £125,000 and £225,000 (£3,000). Your bill would be £6,750.
The buy-to-let investor would pay a stamp duty premium of £4,750 over what the person buying it as their sole property would pay.
Panthera note – on properties of £40,000 or less purchased as a buy-to-let, no stamp duty land tax is currently chargable.
Buy-to-let tax changes – tax on rental profits
This change to the taxation system actually prompted the Daily Telegraph to launch a specific campaign to stop it.
Before April 2017, you could claim back your expenses and your mortgage interest before you calculated what profit you’d made. Let’s look at how that would work for a higher rate taxpayer:
| Income from renting | £10,000 |
|---|---|
| Mortgage interest costs | £4,500 |
| Other deductible costs | £2,000 |
| Taxable income | £3,500 |
| Tax due at 40% | £1,400 |
| Profit from BTL | £2,400 |
When the new system is fully phased in, you can claim your expenses before you calculate your level of profit for taxation. But now, mortgage interest can only be deducted after working out the level of profit you made. So, what would the same higher-rate tax payer face in financial year 2020/2021 after full implementation?
| Income from renting | £10,000 |
|---|---|
| Other deductible costs | £2,000 |
| Taxable income | £8,000 |
| Tax due at 40% | £3,200 |
| Mortgage Interest Relief @ 20% of £4,000 | £900 |
| Tax due | £2,300 |
| Profit from BTL | £1,200 |
As you can see, the tax due has increased from £1,400 to £2,300. The system is being phased between now and financial year 2020/2021 and this is how the same scenario for the same higher-rate taxpayer looks year on year.
| 40% tax payer | Old System | New System | BTL Tax Bill | Net Profit |
|---|---|---|---|---|
| 2017/2018 | 75% | 25% | £1,625 | £1,875 |
| 2018/2019 | 50% | 50% | £1,850 | £1,650 |
| 2019/2020 | 25% | 75% | £2,075 | £1,425 |
| 2020/2021 | 0% | 100% | £2,300 | £1,200 |
If you are a higher-rate taxpayer and your mortgage interest is 75% of more of your rental income, all your profit will be wiped out. For additional rate tax payers, that’s 68%.
If you’re a basic rate taxpayer, you won’t notice any difference unless the profit you make from your buy to let means that you transfer up to the higher tax band.
Buy-to-let tax changes – say goodbye to the automatic wear and tear allowance
Prior to April 2016, buy-to-let landlords were able to deduct 10% of their rental profits for wear and tear. That’s even if they had nothing done to the property.
As you’d expect with the clampdown, this has all changed. Any expenses you do claim you have to provide a receipt for - whether it’s replacing a faulty door or you’re paying someone to paint the window sills.
Buy-to-let tax changes – expenses you can claim for
Panthera’s advice about claiming expenses to reduce your tax bill comes with the same health warning as claiming for wear and tear – be methodical, keep the receipts, record it in Xero.
You can deducted professional services fees (accountants, bookkeepers, legal bills, estate agent fees), insurance costs (landlord insurance), and, for when your property is empty, running costs (utilities, telecoms, rent, ground rent, service charges) and council tax.
Buy-to-let tax changes – you still can’t claim for improving a property
This is one thing that has survived the transition to the new system. You are allowed to spend money to repair something but you’re not allowed to spend money to improve something.
You might get a kitchen cabinet door that’s hanging off its hinges. You can claim that back as wear and tear maintenance. However, if you used the faulty door as a reason to invest in a £15,000 state-of-the-art kitchen with a top-of-the-range Aga, you can’t claim that back.
Buy-to-let tax changes – the taxman won’t hang around for CGT anymore
Previously, you were able to pay capital gains tax on the sale of your buy-to-let properties at self-assessment time. Now, you must pay HMRC in full within 30 days of the sale.
Where it is a limited company who owns a property, this rule has remained the same – simply pay corporation tax on your gain no later than nine months and one day after your financial year end.
Buy-to-let tax changes – want to know more?
Many of Panthera’s clients have invested in buy-to-let properties. If you’re concerned about the changes or you want some advice on how to give yourself the best tax advantages, please call the Panthera team on 01235 768 561 or email enquiries@pantheraaccounting.co.uk.