Our favorite tax specialist Rob Durrant-Walker, from Garbutt + Elliott LLP is back with another important and interesting blog on tax issues facing buy-to-let landlords.
In nearly 25 years working in tax, I don’t think I have ever seen any one sector hit by such a succession of detrimental tax changes as the Buy to Let sector. The government have said that they wish to “reduce imbalances in the housing market”, and as Mortgage Interest Relief at Source for owner-occupiers was never going to come back (anyone of a certain age remember that?) then increasing the taxes on landlords has been the government’s method. Any landlord needs to seriously consider the impact on their finances, but the changes will not be a game-changer for everyone.
Now that we are past 1 April, Landlords are getting used to the idea that they will pay an extra 3% Stamp Duty Land Tax on purchasing new residential lets. That will put some landlords off expanding their portfolio, but others will view it as just paying the equivalent of six months or a year or so’s worth of growth in value that they would otherwise have been willing to pay anyway to a purchaser. Remember that the £40,000 SDLT threshold isn’t a nil rate band, and a property costing £150,000 will now cost you £5,000 in SDLT, rather than £500 for an owner-occupier.
If you are considering purchasing six or more residential properties in one go, then you can opt to treat them as a “commercial” purchase and subject to commercial rates of SDLT rather than residential. That could be beneficial as the top rate of commercial SDLT is 5%, but you would have to review the numbers in each case as to whether taking the option is in your favour.
From April 2017 landlords paying mortgage interest on their residential lets could see their tax relief on interest reduced. The change is being phased in between then and 2020, and will mean that only the equivalent of basic rate tax relief will be given even if they are higher rate taxpayers. There is a twist in this, in that in order to work out if you are a higher rate taxpayer, you must ignore any deduction for the loan interest. Although the higher rate tax threshold is £42,600 – and remember that you must add together your income from all sources to determine if any of it falls into the higher rate band - if you exclude the deduction for the mortgage interest in arriving at the taxable rental profit part of your income then many taxpayers will find themselves unexpectedly affected by this proposed rule.
For some landlords the extra tax will be minimal, it all depends on the mortgage rate and LTV for instance.
Some landlords with larger portfolios will want to consider transferring their portfolio into a company. The benefit will depend on the up-front SDLT cost, the amount of capital gains triggered and if that can be relieved, the differential in mortgage rates paid by a company compared to personal ownership; and of course the long term savings and how much income they wish to retain in the company, or extract.
Rob is a Senior Tax Consultant with Garbutt & Elliott LLP, with 24 years’ experience in tax including at the old Inland Revenue. Rob can be contacted at firstname.lastname@example.org, or on +44(0)1904 464119.