The tax rules regarding buy-to-let property have long been complex. However things are about to become even more difficult for individuals who are landlords of residential property.
The 2016/17 tax year brought significant changes including replacing the 10 per cent wear and tear allowance. The new relief allowing residential landlords to deduct the actual costs of replacing furnishings instead is likely to be less generous in most cases in the longer term.
On top of this, whilst general capital gains tax (CGT) rates have fallen, the rates applicable to chargeable residential property have remained at 18 per cent and 28 per cent; 8 per cent higher than other CGT rates. In addition we have also seen the introduction of a three per cent stamp duty land tax (SDLT) surcharge on all purchases of second or buy to let homes costing above £40,000. All these measures have brought significant extra tax costs to residential landlords.
More is yet to come from April 2017 when we see the introduction of significant restrictions on the interest relief available to individuals who let residential property. The current legislation allows interest relief at the marginal rate of tax, giving individuals relief at up to 45 per cent. This relief is soon to be replaced by a tax credit at the basic rate of tax; currently 20 per cent. In some cases landlords may find that although they are making a loss after interest charges they are still left with a charge to income tax because of this restriction. The resulting higher level of taxable income may also have a knock-on effect on an individual’s personal allowance, high-income child benefit charge and entitlement to child tax credit.
The new rules will be phased in over a four-year period and between now and then individuals could see a huge increase in their tax bills as a result. If in that time we also see an increase in interest rates residential landlords will suffer a double hit and the ongoing impact on the housing market could be significant.
Residential landlords need to consider exactly how these changes will affect them. It may well be that the way in which landlords structure their property businesses will need to change in order to ensure commerciality in the longer term. Moving properties into corporate ownership may be an option for some, but that is not without difficulties. All the more important then to plan ahead to understand the overall impact and the options available.
For more information please get in touch with Jackie Hall, or your usual RSM contact.