Over the last year, residential property investors could be forgiven for wondering what they have done to incur the wrath of the Westminster and Holyrood governments. Many have been surprised by the introduction of significant reforms to the taxation of the buy to let investor which will leave landlords paying more tax, and has the potential to halt the growing buy to let investment market.
New 3% surcharge
The first significant change has been the introduction by the Scottish Government of a land and building transaction tax (LBTT) surcharge. From 1st April 2016 a supplement of 3%, over and above the standard rates of land and buildings transaction tax payable, will be applied on acquiring a second residential property such as buy to let properties and holiday homes. Unlike the progressive nature of LBTT, the 3% surcharge will apply to the whole value of a property transaction which is on or above £40,000. Although the legislation introducing this surcharge is targeted at investors acquiring additional residential property, it has the possibility of impacting on the acquisition of your only and main residence if care is not taken.
Capital Gains Tax changes
As well as finding that investors pay this additional tax when acquiring a property, they now find that the rate of Capital Gains Tax payable on the disposal of a buy to let property is more expensive than other investing activities. For the current tax year, the Chancellor has reduced Capital Gains Tax rates to 10% and 20% from the previous rates of 18% and 28%. However, if the asset being disposed of is a buy to let property then the previous rates continue to apply. In addition, from April 2019, landlords will be required to pay Capital Gains Tax on the disposal of a property within 30 days of the selling of the property. Current rules allow investors to hold on to the tax liability on a property disposal until 31st January following the end of the tax year in which the disposal took place.
Tax reliefs squeezed
Not only do the tax changes catch the buy to let investor at the start and end of their investment, they will now find during the lifetime ownership of the property the tax reliefs available have been squeezed.
From April 2017, landlords will no longer be able to claim a full deduction for financing costs. Instead they will receive a basic rate deduction from their income tax liability for mortgage interest incurred. This change will impact on higher rate and additional rate taxpayers who will find their tax relief on monthly interest payments reduced from 40% / 45% to 20%.
Wear and tear abolished
Before these changes start to bite, buy to let investors will suffer from the abolition of the wear and tear allowance. Where previously landlords have been able to claim a deduction of 10% of their rental income as an allowance to pay for the upkeep of their furnished properties, from April 2016 this relief has been abolished and deductions will be available for actual expenses incurred.
With the introduction of land and buildings transaction tax surcharge and the additional Capital Gains Tax costs on disposal, buy to let investors will need to reconsider the lifetime investment returns achievable from the property market. With the mortgage interest rate restrictions which are being introduced from 2017 and will not fully impact until 2020, some investors may find that their buy to let investments strategy becomes unviable.
Targeted by HMRC
In order to maximise revenues, in conjunction with these new taxing measures, HMRC have also stepped up their Let Property Campaign which is aimed at landlords who have not declared their rental income. The Campaign was launched in 2013 and in its first two years over 10,000 landlords made a disclosure, netting HMRC some £50 million in recovered tax. Landlords with undeclared income are advised to make a voluntary disclosure of income and underpaid tax, as the penalties imposed by HMRC can be significantly reduced. At Thomson Cooper we have had success at minimising penalties, particularly with disclosures that are unprompted by HMRC.
The UK housing supply has been supported by a vibrant and highly regulated private investment market which has been essential in supporting the free movement of labour for the economy of the country.
The taxation changes introduced over the last year and the success of the Let Property Campaign will certainly require investors to review the viability of their property portfolios and may well in the longer term have an impact on the available supply of the private rental property market in the UK.
For advice on any of these issues please contact Alan Mitchell at amitchell@thomsoncooper.com or call 01383 628800. Your first consultation with us is free.