There are new restrictions
affecting landlords with regard to tax on buy to let properties. The new
regulations involve new restriction on tax relief. These new laws and
regulations introduced by George Osborne for summer budget will make it harder
for some investors to achieve a profit. However this has also led to increased
borrowing, when it comes to buy to let mortgages which are due to impending
increase in taxes.
Evidence of this can be
seen because there was a 22% in January compared with the same month in 2015, as
investors hurry to beat the upcoming tax changes. This has led to
an unforeseen result because the 22% demonstrates that the banks and are
willing to lend to buy to let property investors, this shows they have
confidence in the market.
Property firms have been
reporting about high increase in the amount of people buying property's by
using their companies in order to defy
the new rules.
Channel S on 30/12/2015
These new measures and regulations will affect 1 in 5
landlords, according to government they go on to state that the new taxes
could even surpass 100% of profit.
Don't be
concerned if:
1) You own
your property outright and rent out
2) You are
selling your property within the next year or two
Be concerned if:
3) You own a
buy to let mortgage
4) You are
keeping your property beyond 2017
So therefore
this just means that if you are a portfolio holder planning to sell you
property, the new tax laws will not affect you. However if they continue to
also sell properties or put more on the market this could led to a
fall in prices because there is more supply and demand.
Currently
20% is a cap on the amount of tax relief you
can claim on mortgage interest however it is going to be capped
at basic rate. Secondly, this aspect has been largely been over
looked, the manner by which income is totalled. It is not
allowed for landlords to
deduct mortgage loan interests from rental revenue before
they calculate their taxable profit anymore.
Tax experts
only just understand the effects of new regulations. The expectation is
that it is only going to affect 1 in 5 individual buy to
let property owners, who are going to pay more in taxes
than they previously did according to the government. Although
tax experts have started that this estimate is very low and that
it will affect more landlords than that predicted by the government.
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There are 4
key changes or developments on buy to let properties:
1) New Stamp Duty taxes (Changes from 1st April
2016)
The changes
being made to stamp duty taxes is that it will be 3% higher for
people purchasing buy to let properties, than for people buying a
property as their main residence. This new law is also applicable
to people who purchase extra residential properties in the United
Kingdom apart from Scotland, including second homes.
For people
who are single or in relationship that already own one property like their own
homes. Look below to see the new regulation on stamp duty rates:
Tax Band
(Share of purchase cost )
|
Normal Rate
(Main home or first residential property)
|
Higher Rate
(Extra properties)
|
£0 -
£125,000
|
0%
|
3%
Purchases lower than £40,000 exempted
|
£125,000 -
£250,000
|
2%
|
5%
|
£250,000 -
£925,000
|
5%
|
8%
|
£925,000-
£1,500,000
|
10%
|
13%
|
Above
£1,500,000
|
12%
|
15%
|
As
seen from the first table above there will be no
stamp duty calculated if the property is sold for less
than £40,000. This means that the new property owner does not have
to complete a stamp duty return for the purchase. When dealing
with purchases between £40,000 and £125,000 stamp duty
calculated based on the
whole or complete purchase price. Anything higher that
this band is calculated portion by portion - meaning that stamp
duty will depend on what portion, part of
the purchase price falls into the bands.
Suppose you buy a property that costs £300,000, an example is given below:
Stamp duty
|
||
£250,000
|
* 2%
|
= £5,000
|
£50,000
|
* 5%
|
= £2,500
|
= £300,000
|
= £7,500
|
|
Will it affect every transaction?
This new rate or stamp duty taxation only occurs in the countries in the United Kingdom excluding Scotland. It only affects transactions where at the end of the day, the purchaser owns more than one property and is not replacing the home they live in. For property owners who already own a buy to let houses, the higher rate will apply upon the purchase of more houses. The standard or normal rate is applicable where the property owner at the end of day purchase is seeing their current residence and moving into a new home to live in, this is regardless of the amount of property they person owns.
2) New tax relief rules on
buy-to-let mortgages (relief will be capped at 20%)
Presently, a buy to let property owner can
claim relief on their taxes on items such as mortgage
interest, just like if they were a regular business.
This basically means that they can subtract finance costs
from their taxable revenue.
As of now the tax relief that buy to let
property owners can claim on their mortgage interest can be at their
marginal rate (is a tax rate whereby taxpayers pay on
an additional pound £ of income they earn).
However, tax relief is going to be capped at a
basic rate of 20% this will be starting on 1st April 2017 and according to
the government this new regulation will not take into
account what income tax band an owner is placed. This will
be a huge benefit for taxpayers who pay at
a higher rate (40% currently) because will have to pay half of what
they are currently paying.
Buy to let property owners have to calculate their profit in relation to tax without subtracting finance costs, which means profits, will increase.
Buy to let property owners have to calculate their profit in relation to tax without subtracting finance costs, which means profits, will increase.
An important note that needs to be pointed is that
all these changes will not occur overnight. Before all the changes come into
effect there will be various phrases (going 4 years) when dealing with
tax relief deductions:
2017-2018: the deduction from buy to let property revenue (which is the way it is presently) will be limited to 75% of finance costs, while the rest (25%) will be allocated or being used as basic rate decease.
2018-2019: 50% will be available as a basic rate tax reduction while the remaining will be restricted to 50% of the finance costs in relation to property income deduction.
2019-2020: 75% will be allocated as a basic tax rate deduction, with the remaining 25% reserved as income from property deduction.
2020-2021: This is the year that the new tax regulations on buy to let property income will come into full effect. This year will mark the beginning of every financing costs being allocated or given as a basic tax rate been reduction.
Who do the new rules affect?
The people that will be adversely affected will be the additional rate taxpayer who will most likely make a loss due to reduction in tax relief. While the higher rate taxpayer benefits because they will see their tax relief fall to less than half. However, this on the contingent upon the ratio between rental revenue and buy to let mortgage costs.
Tax experts have developed criteria to
tick off in this situation. The first criteria is for higher
rate taxpayers that have finance expenses or costs
go above 75% of rental revenue might receive returns reaching to zero
by 2020 - 2021 tax year. The last criteria are that additional rate
taxpayers, their threshold will be 68% of rental income.
Under the new rules taxpayers could definitely start making losses because they will paying more in taxes than they will be earning as a profit. According to the government these new regulations were brought in order for homeowners to revive a fair shake as well when buying a home. One of debates ongoing particularly among buy to let landlords is those with a buy to let mortgage will see a major dip in profits for their investments, so those who have the money to buy a property without a mortgage will do so anyway.
3) New profit calculation rules
The manner by which buy to let landlords calculate profits will change due to new regulations with regards to tax relief. This new change is mainly because landlords will not be allowed to subtract their mortgage interest and other finance costs from their rental income anymore, therefore leading to increased higher taxable income.
Tax Threshold
Higher total taxable income could lead to major implications for buy to let property owners. This basically suggests that a percentage of basic rate taxpayers could get shifted into the higher rate tax band but this does not mean that they will see tax relief at a higher rate. Also this could mean that higher rate taxpayers could be shifted to the additional rate band.
An essential point to note is that for people who earn £50,000 and over they are not entitled to claim child benefit and for people who earn £100, 000 and over they beginning to lose their personal allowance.
4) New Capital Gains Tax (CGT) deadline
Capital gains tax has to be paid on profits that go above an individual's personal allowance, so taking this in to account when a property owner sells their a property which is not their main residence CGT have to paid. Buy to let landlords who sell their property have to CGT on anything above £11,000 (personal allowance) which is contingent on how much a person earns and what income tax band they fall into, they can pay either 18 % or 28%.
Decreasing your CGT bill
These following expenses can help counter balance an individual’s capital gain tax bill, they can lead to a decease on the amount people, have to pay but they have to ensure that they have records to back them up.
1) Advertising expenses on sale of a property
2) Legal fees or expenses
3) Estate agent expenses
Ways to deal with it
Knowing about the changes ahead of time, buy to let property owners have time to prepare their finances. Doing one of the following options can help with the upcoming changes and restrictions:
1) Remortgage: property owners need to ensure that their mortgage rates are competitive. By comparing different mortgage rates and owners should consider remortgaging their property preferably to a mortgage with a fixed rate, in order to be ready for new regulations. Fixed rate mortgages can protect buy to let landlords from the rise of interest rates, however a negative could be that they will not benefit from the fall of interest rates.
2) Incorporate your business (become a company): By investing through a company all the expenses can be offset against income from rent. A benefit of incorporating will be that corporation tax is predicted to dip to 19% in 2017 and in 2020 to 18%. A disadvantage of this method is income or revenue can only be paid to directors as a dividend.
3) Revaluation
of portfolio: buy to let landlords should thing of selling one or more
of their properties in order to decrease their borrowing on the others; this is
in case of landlords who own multiply rental properties.
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Published on: 18/08/2016
Disclaimer: The information provided in this blog is brought to you by Taj Accountants. As you are reading this blog of your own free will, any information taken from this blog is at your risk. Before using the information provided to apply, to your business seek professional or legal advice. Taj accountants will not be liable for any damages.
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