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The recent tax changes to property income may affect owners of residential properties, here we look at what the changes are and how this will affect landlords.
Mortgage and Loan interest relief
This change will be taking effect from April 2017, when there will be a restriction on tax relief on financial costs such as mortgage interest. This is being phased over a 4 year period and will restrict relief on finance costs to the basic rate of tax and therefore, will have the biggest impact on higher rate tax payers. This could also affect the amount of child benefit and tax changes.
More than 400,000 landlords will be pushed in to a higher tax bracket, this is 22% of the UK’s 2 million landlords that will pay 40% tax on their income rather than 20% when the rules are implemented. Landlords will no longer be able to deduct mortgage interest payments or any other finance-related costs from their turnover before declaring their taxable income. Those without a mortgage will not be affected.
Furnishings and Fittings relief
This change has already taken effect as of April 2016, whereby wear and tear allowance is no longer available to landlords and is instead replaced with a deduction for the actual cost of replacing furnishings. The wear and tear allowance used to be 10% at the net rents received in respect of a fully furnished property for let.
Capital Gains Tax
This change took affect from April 2016, which means landlords of residential properties will experience a capital gains surcharge when they come to sell their properties. The capital gains tax rate was changed to 10% and 20% depending on your tax rate band. Second homes and buy-to-let will continue to be paid at 18% and 28% depending on tax rate bands.
Stamp Duty Land Tax
In March 2016, stamp duty land tax was deductible at full purchase price at a related rate, whereas now it will be charged on the proportion of the purchase price which falls within each rate band. In addition, from April 2016 purchasers of a second home or buy-to-let will be charged a higher stand duty. The surcharge does not apply if it’s the main residence that is being replaced. The new rates of stamp duty land tax are charged from 3%-15% depending on the purchase price.
The Welsh Government’s decision to continue its 3% Stamp Duty Land Tax on additional properties has disappointed landlords. During the summer the welsh government carried out a technical consultation which looked at how the higher rate could be adapted to make it better suited to Wales. The tax revenue generated will help fund public services in Wales.
As landlords are faced with multiple tax changes, providing landlords are aware and actively handling these changes, the buy to let industry remains profitable with a 12% profit recorded in the last year, making it more profitable than other investment opportunities. For more information contact us on 02920489000.