With many of our contractor clients also choosing to invest in buy-to-let property, AJN have prepared a Buy-to-Let Update providing details around five key changing factors, and summarising both the current challenges, as well as the remaining opportunities for each.
The buy-to-let property market has been upheaved in recent months with many changes affecting current and potential landlords. The implications of the SDLT surcharge, up-and-coming changes to the tax relief on mortgage interest, the removal of the wear & tear allowance, as well as, a tightening of mortgage lending criteria for new landlords, and, immigration checks required for new tenants – it’s a lot to keep up with!
Stamp Duty Land Tax surcharge
As from April 2016, anyone purchasing a second home, including a buy-to-let property is liable to pay a 3% surcharge on their Stamp Duty Land Tax (SDLT). Prior to April, the market saw a surge in activity with landlords fighting against the deadline to avoid the extra tax.
Were you one of those who snapped up a new investment property before the hike?
Following April, any new property investments will be liable to pay the 3% surcharge, on top of the regular SDLT amount. It certainly is an added cost to investment however, on the plus side, the SDLT can be deducted in the Capital Gains Tax (CGT) calculation on sale, as a deductible expense.
Challenge – added up-front cost of investment
Opportunity – the SDLT can be claimed back in full against CGT on sale
Cuts in tax relief on mortgage interest
The government have announced that from April 2020, tax relief on mortgage interest will only be available at the rate of basic tax, currently 20%. This will affect those landlords who pay higher rate or top-rate tax, across all income streams.
From next year, this new system will be phased in as follows:
- April 2017 – higher rates can be claimed for 75% of mortgage interest costs
- April 2018 – higher rates can be claimed for 50% of mortgage interest costs
- April 2019 – higher rates can be claimed for 25% of mortgage interest costs
- April 2020 – only basic rate tax relief can be claimed
Landlords are therefore taking action now.
Read more: What are your options? Read more about the current regime on buy-to-lets
A survey by Paragon Mortgages showed that 41% of landlords were considering a change in trading structure, increasing to 63% for landlords with large portfolios.
However, careful tax planning is required to ensure the tax savings would be worthwhile for the additional financial commitments with running a limited company. This particularly applies if you trade as a limited company for your contractor business.
Challenge – reduction in available tax relief for higher-rate and top-rate tax payers
Opportunity – demand is still high for rental, at least for the moment, so landlords have the option to raise rents to cover extra tax. There could be a tax-saving opportunity by trading from a limited company.
No more Wear & Tear Allowance – what instead?
The Wear & Tear allowance was a valuable tax allowance for landlords where by 10% of the rental income could be claimed for general repairs and renewals, even if no cost was actually incurred.
This has been removed and instead only the actual costs can be claimed.
Read more about the Wear & Tear allowance to be replaced by new relief.
For tax purposes, careful timing of repairs and maintenance can help to bring your tax bill down, whilst keeping up the standard of your property.
Challenge – loss of a valuable tax relief for landlords
Opportunity – careful tax planning in-line with property improvements can still provide some tax relief.
Tightening of mortgage lending criteria
Buy-to-let has boomed in recent years, with an estimated value of over 200 billion pounds. It has also recently been accountable for an imbalance in the property market, driving up prices that could be a risk to the entire UK property market, and wider economy.
The SDLT surcharge was initiated to curb buy-to-let investment and with the EU Referendum around the corner, causing uncertainty in the economy, the Bank of England (BoE) have taken a small measure to curb buy-to-let lending further.
The recommendation by the BoE to lenders is that rental income must be able to meet a mortgage rate of at least 5.5 percent.
This is because lenders intend to raise lending to landlords by 20 percent per year and rates continue to be attractive to buy-to-let investors.
Challenge – slightly stricter affordability tests for mortgage lending
Opportunity – still plenty of mortgage options
Immigration checks on new tenants
The government have recently increased the responsibility of landlords to vet their tenants for the rights to live in the UK.
From 1 February, landlords are required to check passports and visas of new tenants and a copy made as proof that the check has been carried out. If an ID runs out before the tenancy, further checks need to be scheduled to ensure a new document gets issued. Also, for those with only a temporary right to rent in the UK, a follow-up is required.
This has come as a shock to landlords, however penalties of up to £3,000 are in place for failure to comply.
Challenge – more paperwork and possibly more cost
Opportunity – the Residential Landlords Association + others are appealing the new legislation, so changes may come around in due course.