Buy-to-let: changes you need to know

Being a buy-to-let landlord has become a lot more challenging.

row of terraced houses

The Chancellor announced a cut to capital gains tax in the 2016 Budget, but landlords who sell their property will not benefit.

This has prompted the Association of Residential Letting Agents to accuse the government of an “outright assault” on the buy-to-let sector.

The basic rate of capital gains tax (CGT) has fallen from 18% to 10%. The higher rate has fallen from 28% to 20%.

The lower rates are a boost to many investors who will in future pay less tax on any profits from the sale of assets such as stocks and shares.

Tax in action

For example, a basic-rate taxpayer who made a £10,000 gain (above the tax-free allowance of £11,100, which every adult is entitled to), would pay tax of £1,800 under the previous regime.

Now, the same taxpayer would expect a CGT bill of just £1,000.

However, the cuts do not apply to any gains made on the sale of residential properties.

In other words, landlords will effectively face a capital gains tax surcharge when they sell up.

“Incentive to invest”

In the Budget speech, the chancellor explained that the decision was intended to “ensure that CGT provides an incentive to invest in companies over property”. 

But landlords could be forgiven for feeling under a sustained tax attack from the chancellor.

George Osborne only recently announced that landlords will now also pay a stamp duty surcharge on buy-to-let homes of three percentage points above the current rates.

For example, a property bought before 1 April 2016 for £500,000 attracted stamp duty of 0% on the first £125,000, 2% on the next £125,000 and 5% on the remaining £250,000, or £15,000 in total.

Now, the rates are 3%, 5% and 8% respectively, adding up to a bill of £30,000 for buyers who already own one or more residential properties.

Landlords with more than 15 properties had been hoping to escape the extra cost, but Osborne declared in the March 2016 budget that all buyers of second homes would be subject to the levy.

The surcharge also applies if you are buying a new main residence, but your previous home has not been sold.

However, you will now have 36 months, instead of the threatened 18 months, to apply for a refund if you subsequently sell your old main residence. 

Wide impact

The higher rates of stamp duty could affect more than just landlords.

You could, for example, be caught out if you are buying a home with another person who already owns an additional property.

Parents could also end up paying the surcharge if they help their children to buy a home and are named on the deeds. 

Wear and tear

That’s not all. In another change to the tax regime implemented in April 2016, landlords can only claim for wear and tear costs they incur – and they must provide itemised receipts.

The previous regime allowed landlords to deduct an annual allowance from their taxable profits for notional wear and tear, irrespective of their actual expenditure. 

Mortgage relief

Changes to mortgage interest tax relief could also make life more difficult for landlords.

At the moment, landlords can offset all their annual mortgage interest against their income from a property and pay tax only on the difference. So if your rental income is £10,000 a year and your mortgage interest is £9,000, you'll have to pay tax on £1,000.

A 20% basic-rate taxpayer would therefore pay £200. Someone who pays tax at 40% would owe £400, or £450 for a top-rate taxpayer.

From 2017, the way the tax relief is calculated is going to change. The new rules are complex, but basically you will have to pay tax at your personal tax rate on the entire income from a property, less a 20% tax credit that will be phased in gradually by 2020.

If you pay income tax at the basic rate of 20%, there will therefore be no difference in your tax bill.

Let’s say your buy-to-let property generates a rental income of £10,000 a year with mortgage interest of £9,000.

In 2020, when the new rules are introduced in full, you will be taxed at 20% of £10,000 (or £2,000). Then 20% of your £9,000 mortgage interest payments (or £1,800) can be deducted, leaving you with a tax bill of £200, the same as before.

But higher and top-rate taxpayers will pay more. Based on the same scenario, the tax bill for a higher-rate taxpayer will be £2,200 or £2,700 for a top rate taxpayer.

The raft of changes will almost certainly add to the cost of a buy-to-let for many landlords. It is therefore more important than ever to weigh up the pros and cons of investing in buy-to-let property.

And if you are a landlord, make sure you're getting the best deal possible on landlord insurance via MoneySuperMarket.

Please note: any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

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