Is the UK housing market “broken”?
The taxation of rental properties for landlords has changed significantly recently as part of a fix due to Government Ministers’ perception that the UK housing market is “broken”. A summary of the recent and upcoming changes follows:
Wear and Tear Allowance
The wear and tear allowance previously available for furnished lettings was withdrawn from 6 April 2016. This gave an automatic deduction for 10% of rents received to be claimed as an expense of the business, regardless of any replacement of furniture that had taken place. A new ‘replacement relief’ has been introduced and it is now possible to claim relief for replacement furnishings, providing the new item is of a similar standard to what it is replacing, although there is no relief for the original expenditure.
This will mean many landlords will see an increase in their rental profits.
Interest Relief Restriction
A further significant change is the restriction to interest relief on residential lets. Interest charges have previously been allowed as a deduction against rental income, but the changes being phased in from 2017/18 mean that this deduction will be withdrawn over the next four tax years, and will be replaced by a reduction to the individual’s tax liability at the rate of 20% only. You might therefore assume that the change will not affect you if you are a basic rate taxpayer, however, the change impacts further than this because it increases your total taxable income, meaning that this could push the taxpayer into the higher rate or even additional rate tax band, against which you would only receive a tax credit of 20% of the previously allowable interest. The impact will be even greater for those whose income is pushed over the £100k threshold as a result, leading to the withdrawal of their personal allowance and a marginal tax rate of 60%, or for those in receipt of child benefit.
Making Tax Digital
Landlords are included in the first group of taxpayers that will be brought into the online quarterly reporting regime, under the Government’s proposals for Making Tax Digital. Despite calls by the Treasury Committee for the implementation of MTD to be pushed back, HMRC have recently published their response to the consultation process, confirming that they will keep to their original timeframe, so landlords will be expected to be able to comply with the online filing requirements by April 2018 if rental income is more than £10,000 per annum.
Capital taxes for landlords are also more onerous than for other assets. Whilst the capital gains tax (“CGT”) rate for most assets was reduced in April 2016 to 10% for gains falling in the basic rate of tax and 20% for those in the higher rate, gains on residential property remain to be taxed at 18% and 28% respectively.
Stamp Duty Land Tax
For additional residential properties purchased since 1 April 2016, higher rates of Stamp Duty Land Tax (“SDLT”) apply, with a 3% surcharge in addition to the usual banded rates. A further proposal will potentially increase the reporting burden, and bring forward the payment date for CGT, should landlords wish to sell properties. When residential property is sold from April 2019, the gain will need to be calculated and any CGT paid within 30 days of completion of the disposal, rather than by the 31 January following the tax year of disposal. So, for a disposal on 6 April 2019 the payment date will be 5 May 2019, compared to a payment date of 31 January 2020 for a disposal a day earlier!
The increasing tax burdens point towards the Government trying to discourage private landlords, and recent press does show that they wish to increase the opportunities for individuals to either own their own homes or be able to obtain long-term tenancies, on a much larger scale than currently available, which the Government envisages Councils and other such organisations providing, rather than the private buy to let market.
What is clear is that landlords need to reassess whether their property investments are going to meet their goals in the future, as the tax burden is likely to increase and the net returns fall.
If you would like help to review your position or more advice around the taxation of rental properties for landlords, please do get in touch with Tara Hayes on 01823 286096
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