Buy to let landlords will probably be thinking “why us”…again! Every few months there is a new regime that seems to be targeted at making life difficult for rental property owners. The new tax legislation relating to claiming tax relief on mortgage interest, is now in force from April 2017. However, there are four other changes that investment property owners need to know about.
This does not constitute advice and advice should be sought in all instances before acting on it. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
(1) New tax regime on rental income and mortgage interest
This topic has been covered several times before, however, now the rules actually apply, it is essential for all investment property owners to fully understand it’s implications.
For anyone planning on investing in property, it is also vital to grasp how you will be taxed now that the legislation has changed.
Currently, you will pay tax on your rental profits, which is calculated as rental income less deductible expenses.
The tax percentage you pay is determined by all your other income, so if you have enough left in your basic rate tax band after your salary, dividends and self-employed profits, then your rental income will also be taxed at 20%.
If you pay tax at the higher rate of tax, then your rental profits will also be taxed at 40%. The same method applies if you pay top rate tax at 45%.
Mortgage interest is the largest tax deductible cost for landlords. From April 2017 however, it is only possible to claim tax relief on your mortgage interest at the basic rate, i.e. 20%.
This means that many landlords will be subject to paying higher rate tax on their rental income, but only be able to claim tax relief at the basic rate of tax on their main expense.
It is estimated that 440,000 landlords will be forced up into a higher tax bracket due to these changes.
(2) Wear & tear costs are no more
Before April 2016, landlords could claim 10% wear & tear allowance even if they incurred no such costs. This helped to keep the tax down as 10% of the rental income was dedicated automatically as a repair allowance.
Whilst this change has been a year in operation already, those completing their tax returns now will feel the effect.
(3) It’s getting harder to get a mortgage
Whilst we are still securing deals for many buy to let property investors, there is no doubt that it is more difficult to obtain a good mortgage.
Terms are less flexible and regulations are tighter.
- Lenders are now encouraged to base their affordability calculations on a mortgage interest rate of 5.5%, regardless of the actual rate
- Landlords need to confirm they will earn a rental income, at least 125% of the mortgage. Therefore, a mortgage payment of £1,000 per month would need a rental income of £1,250 per month to comply.
In addition, the mortgage regulators have informed lenders they can assume that all buy to let borrowers are higher rate tax payers, even if they currently are not.
In reality, this means that the rental income coverage may need to be closer to 145%, so using the above example, rental income would need to be £1,450 to cover a £1,000 per month mortgage.
Work with a mortgage adviser to ensure you are getting the best deal for your buy to let mortgage, and that you have considered all the options.
(4) Extra stamp duty on second homes
This is also something we have covered before, but it is now very relevant to anyone considering property investment.
Second property purchases command a 3% Stamp Duty surcharge, on all properties over £40,000.
(5) Capital Gains Tax is higher
On the sale of a rental property, Capital Gains tax (CGT) applies. This has always been the way.
However, from April 2017 the CGT for rental properties has increased to 18% for basic rate tax payers and 28% for higher rate tax payers.
This compares to 10% and 20%, respectively, if you sell your private home.
Although, everyone does have an annual CGT allowance of £11,300, for 2017-18, which does help to whittle down any CGT liability, buy to let property owners will surely end up paying more CGT where it is due.
Need help with your buy to let mortgage? Speak to Chris
If you would like to review an existing buy to let mortgage, or are considering a new investment, Chris can discuss your options:
Tel: 01403 780 770
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