New Landlord Taxes
09 March, 2016For many people buy-to-let property has been an attractive income producing investment at a time of low saving rates and stock market volatility. But with many would-be buyers priced out of acquiring property and forced to rent instead, driving up tenant demand and rents, the Chancellor George Osborne has made it his goal to create what he described as a “level playing field†between landlords and those buying homes to live in.
3% RISE IN STAMP DUTY (SDLT) In his Autumn Statement last year, the Chancellor announced that a 3% rise in stamp duty for buyers of second homes and buy-to-let landlords will come into play from April 2016, almost trebling the purchase tax on a typical £275,000 buy-to-let home from £3,750 to £10,800. This came five months after he slashed the tax relief that landlords can claim on mortgage interest costs from 100% currently to 0%, to be phased in gradually by April 2020. The silver lining however is that Landlords will be able to offset the higher stamp duty purchase costs against any future capital gains when they come to sell the property.
Example Property purchase price: £500,000 Current SDLT tax to pay: £15,000 Additional SDLT from April 2016: £15,000 Total SDLT: £30,000 (an increase of 100%) MORTGAGE INTEREST TAX RELIEF CUTS Currently Landlords can offset 100% of their mortgage interest costs against their rental income and therefore their tax bill. However this will all be changing soon. The amount of mortgage interest costs that can be claimed will reduce from 100% now to 0% by April 2020. Not surprisingly this will have an enormous affect on the profitability on buy-to-let investments as the examples below show.
Examples Based On Personal Tax Band: 40% Property Value £500,000 Monthly Rental Income: £1,500 (assuming no rise over 4 years) Monthly Mortgage Cost: £1,000 Monthly Rental Income Less Mortgage Costs: £500 2016-17 (100% Tax Offset) Total Taxable Rental Income: £500 Tax Payable (@40%): £200 TOTAL INCOME: £300
2017-18 (75% Tax Offset) Total Taxable Rental Income: £750 (£500 + 25% of £1,000) Tax Payable (@40%): £300 TOTAL INCOME: £200
2018-19 (50% Tax Offset) Total Taxable Rental Income: £1,000 (£500 + 50% of £1,000) Tax Payable (@40%): £400 TOTAL INCOME: £100
2019-20 (25% Tax Offset) Total Taxable Rental Income: £1,250 (£500 + 75% of £1,000) Tax Payable (@40%): £500 TOTAL INCOME: £0
From 2020 (0% Tax Offset) Total Taxable Rental Income: £1,500 (£500 + 100% of £1,000) Tax Payable (@40%): £600 TOTAL INCOME: - £100 WEAR & TEAR RELIEF The 10% Wear-and-Tear tax relief for landlords who rent out furnished homes will also be abolished from April 2016, leaving landlords free to claim only for the amount that they have actually spent.
CAPITAL GAINS TAX A change to Capital Gains Tax (CGT) rules also means buy-to-let landlords will, from April 2019, have to pay any CGT due within 30 days of selling a property, rather than waiting until the end of the tax year, as at present.
The pending stamp duty rise has led to a rush of people trying to complete buy-to-let purchases before April, which has been supporting prices. But should the buy-to-let market slow thereafter, as many analysts anticipate, it may enable more first-time buyers, squeezed out by investor-driven purchasers, to get on the housing ladder. It will also alleviate the Bank of England's fears that the burgeoning buy-to-let market, which accounted for a significant share of outstanding and new mortgages in 2015, could pose a risk to financial stability.
Osborne's decision to cut tax incentives and increase stamp duty rates for landlords will undoubtedly make buy-to-lets considerably less profitable and therefore less attractive.
OUTLOOK It is widely regarded that the increase in taxes on Landlords coupled with a growing demand from renters, and with potentially fewer landlords coming into the market, will result in rents rising. This rise in rents is likely to go some way in offsetting the additional costs faced in taxes by Landlords. The result could be essentially the opposite to what the government has planned. Economists at accountancy firm PwC estimate that 7.2 million households, including 40% of people under 40, will be living in private rented accommodation by 2025, compared with 5.4 million today and just 2.3 million in 2001. Higher rents make larger deposits even harder to save up for resulting in a younger generation that will increasingly become priced out of the market.
Of course, being a landlord is not without its challenges. But with the latest HomeLet Rental Index showing that UK-wide average rents hit an all-time high of £1,560 per month in Q3 2015, up 7.5 per cent year-on-year, many investors continue to rent out their homes at a healthy profit.
With alluring rental returns achievable and low-cost interest-only mortgages, otherwise deemed too risky for regular homebuyers, still available to landlords, buy-to-let continues to have plenty of momentum and appeal to investors. What's more, landlords can still offset purchase costs, including a bigger stamp duty bill, against any eventual capital gains tax when selling up later on, assuming there is a profit that is.
With over 2 million landlords in Britain owning around 4.6 million homes collectively worth almost £1 trillion - a fifth of the country's private housing wealth – it'll take a lot more to slow down the buy-to-let phenomenon.
3% RISE IN STAMP DUTY (SDLT) In his Autumn Statement last year, the Chancellor announced that a 3% rise in stamp duty for buyers of second homes and buy-to-let landlords will come into play from April 2016, almost trebling the purchase tax on a typical £275,000 buy-to-let home from £3,750 to £10,800. This came five months after he slashed the tax relief that landlords can claim on mortgage interest costs from 100% currently to 0%, to be phased in gradually by April 2020. The silver lining however is that Landlords will be able to offset the higher stamp duty purchase costs against any future capital gains when they come to sell the property.
Example Property purchase price: £500,000 Current SDLT tax to pay: £15,000 Additional SDLT from April 2016: £15,000 Total SDLT: £30,000 (an increase of 100%) MORTGAGE INTEREST TAX RELIEF CUTS Currently Landlords can offset 100% of their mortgage interest costs against their rental income and therefore their tax bill. However this will all be changing soon. The amount of mortgage interest costs that can be claimed will reduce from 100% now to 0% by April 2020. Not surprisingly this will have an enormous affect on the profitability on buy-to-let investments as the examples below show.
Examples Based On Personal Tax Band: 40% Property Value £500,000 Monthly Rental Income: £1,500 (assuming no rise over 4 years) Monthly Mortgage Cost: £1,000 Monthly Rental Income Less Mortgage Costs: £500 2016-17 (100% Tax Offset) Total Taxable Rental Income: £500 Tax Payable (@40%): £200 TOTAL INCOME: £300
2017-18 (75% Tax Offset) Total Taxable Rental Income: £750 (£500 + 25% of £1,000) Tax Payable (@40%): £300 TOTAL INCOME: £200
2018-19 (50% Tax Offset) Total Taxable Rental Income: £1,000 (£500 + 50% of £1,000) Tax Payable (@40%): £400 TOTAL INCOME: £100
2019-20 (25% Tax Offset) Total Taxable Rental Income: £1,250 (£500 + 75% of £1,000) Tax Payable (@40%): £500 TOTAL INCOME: £0
From 2020 (0% Tax Offset) Total Taxable Rental Income: £1,500 (£500 + 100% of £1,000) Tax Payable (@40%): £600 TOTAL INCOME: - £100 WEAR & TEAR RELIEF The 10% Wear-and-Tear tax relief for landlords who rent out furnished homes will also be abolished from April 2016, leaving landlords free to claim only for the amount that they have actually spent.
CAPITAL GAINS TAX A change to Capital Gains Tax (CGT) rules also means buy-to-let landlords will, from April 2019, have to pay any CGT due within 30 days of selling a property, rather than waiting until the end of the tax year, as at present.
The pending stamp duty rise has led to a rush of people trying to complete buy-to-let purchases before April, which has been supporting prices. But should the buy-to-let market slow thereafter, as many analysts anticipate, it may enable more first-time buyers, squeezed out by investor-driven purchasers, to get on the housing ladder. It will also alleviate the Bank of England's fears that the burgeoning buy-to-let market, which accounted for a significant share of outstanding and new mortgages in 2015, could pose a risk to financial stability.
Osborne's decision to cut tax incentives and increase stamp duty rates for landlords will undoubtedly make buy-to-lets considerably less profitable and therefore less attractive.
OUTLOOK It is widely regarded that the increase in taxes on Landlords coupled with a growing demand from renters, and with potentially fewer landlords coming into the market, will result in rents rising. This rise in rents is likely to go some way in offsetting the additional costs faced in taxes by Landlords. The result could be essentially the opposite to what the government has planned. Economists at accountancy firm PwC estimate that 7.2 million households, including 40% of people under 40, will be living in private rented accommodation by 2025, compared with 5.4 million today and just 2.3 million in 2001. Higher rents make larger deposits even harder to save up for resulting in a younger generation that will increasingly become priced out of the market.
Of course, being a landlord is not without its challenges. But with the latest HomeLet Rental Index showing that UK-wide average rents hit an all-time high of £1,560 per month in Q3 2015, up 7.5 per cent year-on-year, many investors continue to rent out their homes at a healthy profit.
With alluring rental returns achievable and low-cost interest-only mortgages, otherwise deemed too risky for regular homebuyers, still available to landlords, buy-to-let continues to have plenty of momentum and appeal to investors. What's more, landlords can still offset purchase costs, including a bigger stamp duty bill, against any eventual capital gains tax when selling up later on, assuming there is a profit that is.
With over 2 million landlords in Britain owning around 4.6 million homes collectively worth almost £1 trillion - a fifth of the country's private housing wealth – it'll take a lot more to slow down the buy-to-let phenomenon.