With the latest Budget still fresh in everyone’s minds, it’s easy to lose track of the changes actually impacting landlords today.
Of course, change can be a good thing – even if it complicates tax matters. However, for landlords who don’t have the time to keep abreast of every update, it’s hard to keep up and remain compliant.
That’s why we’ve asked Mike Parkes from GoSimpleTax to weigh in on the recent tax changes likely to affect you.
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Licensing for homes of multiple occupation is changing
Are you looking to convert or buy property for the purposes of creating a home of multiple occupation (HMO)? Some of the biggest upcoming changes will impact you. Under previous rules, landlords could easily convert a family home into a small HMO with up to six occupants. Converting a home so that it had seven or more occupants would typically require planning permission.
Now, local authorities have more control over developments in their community. If your local authority places the area surrounding your property under an article 4 direction, for example, you’ll need planning permission to get your HMO licence (provided there’s a material change of use) regardless of the number of occupants.
Many local authorities have already implemented city-wide article 4 directions. In addition, mandatory licensing now applies to all HMOs with five or more tenants who share facilities, irrespective of the number of stories within a building.
This is the final year of mortgage relief
In April 2017, landlords were told that tax relief on mortgage costs would be phased out over a period of four years. Each year, the relief has been reduced by 25%, with only a basic-rate tax credit being offered in 2020/21.
As a result, this is the last tax year that landlords can deduct the interest paid on their mortgage from their income (this year's deduction being 25%).
However, landlords are entitled to a 20% tax credit this year for all their property finance costs to mitigate the loss. The aim of this move is to increase the amount of tax paid by higher or additional-rate landlords.
Your personal allowance has increased
In 2019, it was announced that the personal allowance would be increasing from £11,850 to £12,500. This was welcome news for landlords as your Personal Allowance concerns the amount of your income that remains untaxed.
Thanks to the increase, the tax brackets in the UK were also raised. Specifically, the basic rate limit was increased to £37,500 and the higher rate threshold was set at £50,000.
This will help many landlords retain profit – particularly those who have additional earnings outside of property or those who own multiple properties.
Your Capital Gains Tax allowance may increase
When you sell a property, you pay Capital Gains Tax. The allowance against this tax was £12,000 in 2019/20 which meant you could make that much profit from the sale before being taxed.
However, in April 2020, the Capital Gains Tax allowance will increase to £12,300. Anything above the allowance, though, will be taxed at 18% for basic-rate taxpayers and 28% for additional-rate taxpayers.
There is additional relief you can benefit from when selling a property, provided you’ve lived in it. This is currently known as Private Residence Relief and can significantly reduce Capital Gains Tax should you qualify.
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