Big Changes to Property Tax – what do the new rules and rates mean?

It’s fair to say that there have been a lot of changes to tax rules relating to rental properties.  In fact, tax has been quoted as the single major reason for landlords quitting the market.

In fact, there have been so many changes that we thought we’d take a few minutes to review the landscape in terms of tax and what might be coming next for the Private Rented Sector.

Starting from the very beginning, for landlords looking to enter the market by buying second properties (rather than those who have become accidental landlords through, say, inheritance) there is the Land and Building Transaction Tax (LBTT) – a 3% levy on the purchase of second homes.

Originally designed to increase the amount of housing stock available for new buyers by discouraging landlords buying additional properties, the jury is still very much out on whether the LBTT is having the desired effect of increasing the number of properties available for owner occupiers.

What about tax on rental incomes?  The Finance Act changed the basis of the way landlords are charged income tax, with the changes being phased in from the start of this tax year (2017 – 18). 

The main change being phased in over four years from April 2017 is that relief on finance costs including mortgage interest for landlords is going to be restricted to the basic rate.  This means that landlords will no longer be able to deduct all finance costs from income to arrive at a profit figure.

Instead they will receive a basic rate deduction from their income tax liability for finance costs. 

The change is being phased in – in 2017/18 the deduction from property income will be restricted to 75% of finance costs with the remaining 25% being available as a basic rate tax reduction.  Over the subsequent three years the direct deduction of finance costs will reduce by 25% each year until 6 April 2020 when all finance costs incurred by a landlord will be given as a basic rate tax deduction.

There is an additional issue, though.  Landlords who previously were on the cusp of the high rate tax band may be pushed into the higher rate because of the changes. 

Effectively, in a number of cases landlords are being charged on turnover, not profits which to many, doesn’t seem particularly fair.  After all, no other business is taxed in this way.

So, what will the effect of these changes be?

That’s a difficult question to answer right now.  There will be a large number of landlords who philosophically shrug their shoulders and say ‘them’s the rules’.

There’ll be another group – wealthier landlords who don’t have a mortgage – whom the changes won’t effect.

There’ll be a group who are wondering what it all means.  In the latter case, we believe a knee jerk reaction will probably be the wrong one – changes are being phased in and 2020 is a long way off.  You might end up paying a bit more tax next year but equally this might be offset with higher rentals.

And the final group – those on the cusp of a higher tax band – for whom the changes are undoubtedly bad news.  Our advice in this case is to get some guidance from your advisers… just to talk through your individual scenario.

We have to say that although these changes could be seen as a bad thing the industry is actually reacting pretty positively.  For example a number of specialist lenders are developing Buy To Let mortgage products specifically for limited companies.

If you’d like to chat through your Buy To Let options, call Neil at Find My Mortgage on 0131 4411 000.