One in 10 people now own a second house. Yet, despite it being a fruitful investment, tax legislation surrounding landlords remains largely unclear. Taxes associated with buy-to-let property are collectively known as ‘landlord tax’. To make matters more complicated, the legislation is complex, and comprehensive advice is hard to find.
With that being the case, we thought it would be useful to break down two recent changes to landlord tax, and detail exactly what you need to know.
The dismantling of interest tax relief
If you’re a buy-to-let landlord, one thing you need to get to grips with is interest tax relief. Traditionally, landlords were required to declare rental income, but could claim mortgage interest as an expense - drastically reducing their profit from rental income and subsequently their self-assessment tax bill.
However, this changed for the worse (for landlords at least) in 2017, when it was announced that mortgage interest as a deductible expense would be phased out. For the 2017/18 tax year you could only claim 75% of your mortgage interest, dropping to 50% in 2018/19 and 25% in 2019/20 - with the intention to phase it out entirely from 2020/21 onwards.
This has been replaced with a new tax relief for finance costs, which restricts tax relief to 20%. This change has a major impact on landlords who are higher-rate tax payers, as it will effectively increase their tax bill. Landlords who previously paid tax at the basic rate of 20% could now be liable to pay tax at the higher rate of 40%.
Fortunately, the likelihood of being bumped up a bracket has been reduced as the government raised Personal Allowances to £12,500. Subsequently, the higher rate threshold has increased from £46,350 to £50,000.
Therefore, in the interest of keeping HMRC happy and avoiding being penalised by incorrectly claiming mortgage interest payments, you must fill in the SA105 section on the self-assessment tax return.
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The burden of Stamp Duty
Stamp Duty Land Tax also needs to be on your radar as a landlord. A tax paid when buying a property in England and Wales, it’s been widely criticised (by both landlords and regular homeowners) as being unnecessary at an already expensive time.
There have also been instances of buyers overpaying. In the 2018-19 tax year alone, nearly £400m was returned to those who had paid too much. Regardless, the legislation is still very much in effect, and landlords are liable to pay even more than residential buyers. Specifically, since April 2016 landlords have been expected to pay an additional 3% in Stamp Duty Land Tax.
For example, if the property being purchasing is in the bracket £250,001 - £925,000, regular buyers will be expected to pay 5% in Stamp Duty, whereas landlords will pay 8%. This is in part due to the increasingly sympathetic approach to first-time buyers and a raised expectation for investors or multiple homeowners to shoulder the tax burden.
However, there are a number of circumstances where you may claim relief (or exemption) from Stamp Duty. If you’re a registered social landlord, for instance and a public subsidy funds the sale, you will be eligible. Similarly, if you inherit a property through death or divorce, you’ll be exempt.
Other exemptions include but aren’t limited to cases where:
- payment was not transferred for the property;
- you bought a freehold property for less than £40,000;
- you bought a new or assigned lease of seven years or more, as long as the premium is less than £40,000 and the annual rent is less than £1,000.
For both landlords and residential buyers, the most common misconception around Stamp Duty is when the payment is due. Stamp Duty isn’t paid solely on the purchase - the charge is applied on the majority of transactions relating to the land, grants or assignments of leases - each carrying the 3% extra fee. So it pays to be aware of any relief you may be eligible for.
Copyright © 2019 Mike Parkes of GoSimpleTax, providers of tax return software that can help you manage your self-assessment tax return. Sign up for a free 14 day trial now.