16th June 2016Buy-to-let landlords – Time for smart planning, not a siege mentality

Yet while many buy-to-let landlords – and those wishing to become one – have been impacted by the new tax rules, the effects are far from universally negative.

For starters, Stamp Duty Land Tax (SDLT)

SDLT is the tax charged on residential property purchases. Reforms introduced at the end of 2014 abolished the old “slab” system, making the increase in tax rate between thresholds more gradual, and making smaller properties more affordable for all – including landlords.

While there were increases in stamp duty for the most expensive properties, the Chancellor claims that the changes have resulted in 98% of homebuyers paying less tax than they would have done under the old system.

April 2016 saw the introduction of a 3% SDLT surcharge on all purchases of “additional residential properties” – in other words, second homes or buy-to-let property. While this extra tax applies to both individuals and companies purchasing a buy-to-let property, there are some reliefs available:

• Multiple Dwellings Relief – where a purchaser acquires more than one property in a single transaction, the average price per unit can
be taken for the purposes of calculating the SDLT due, subject to a minimum charge of 1% of the total consideration.
• Non-residential rates – a purchaser of six or more residential units in a single transaction can opt to pay commercial property SDLT rates rather than the residential rates of SDLT. Commercial property rates are typically lower.

Another important change to come in this April was the abolition of the old, flat rate “wear and tear” allowance that landlords letting out a furnished property could deduct from their gross rent.

Under the new rules, the owners of furnished properties can now deduct the cost of replacing individual capital items. While less straightforward than the old flat rate system, the new requirement could prove beneficial for landlords with a significant outlay ahead.

Mortgage interest

From next April, the tax relief available to higher and additional rate taxpayers who have a mortgage on their buy-to-let property will be gradually reduced.

By 2020 the ability of mortgage interest payments to reduce a landlord’s income tax liability will be limited to 20% of the amounts paid. For those high earners who currently receive tax relief at 40%, or even 45%, this will translate into a substantial tax hit.

However there are options for landlords seeking to mitigate the impact:

1. Split up ownership of the portfolio between individuals to ensure as much rental profit as possible is taxable in the basic rate tax bands. However when taking this approach, the capital gains tax and SDLT impact of transferring existing property must be considered.
2. Transfer the existing portfolio to a limited company – although there are SDLT and potentially capital gains tax implications to consider when doing this. It is important to take advice on any transfer of an existing portfolio, but it should certainly be considered for a new acquisition.

The continued appeal of buy-to-let

With UK interest rates likely to remain low for several more years, buy-to-let’s combination of rental yield plus potential capital growth is still a compelling one.

The tax implications of property investment can be complex, and both those who already own a portfolio – and those planning to acquire one – should take expert advice.

Choosing the right strategy, whether with purchases or existing ownership, can mitigate – or even eliminate – the impact of the recent shake-up in the way such investments are taxed.

For more information, please contact:

Tim Walford-Fitzgerald, Private Client Principal
T 020 7380 4927
E twfitzgerald@hwfisher.co.uk