There has been a raft of tax changes recently that could adversely affect landlords who rent out residential properties. Below is our brief overview of the key points.

Interest

If you are a higher rate taxpayer or close to being one, then this will affect you and could result in you paying an effective rate of tax at over 100% on your rental profit. (Examples below).

The government will be restricting relief for interest to 20%. Therefore if you are a 40% or 45% taxpayer before any rental profit, by 2020/2021 you would lose half or over of the relief on the interest.

Also, basic rate taxpayers or taxpayers making a loss on the property(ies), you could be also caught. The rental profit is now calculated as Rents received less costs (excluding mortgage interest), to determine what tax rate is paid.

This restriction is being phased in at 25% 2017/2018, 50% 2018/2019 and 75% 2019/2020 so there is time to mitigate the full effects of this.

Capital Gains Tax

Selling the property will also be more expensive, at the time of writing, the standard Capital Gains Tax Rates are 10% for basic rate tax payers and 20% for higher rate.

However, the above rates do not include sales of residential property the tax rates for this will be 18% for basic rate tax payers and 28% for higher rate (unless it is your own principal private residence).

Stamp duty

If you are purchasing an investment property with your share being £40,000 or more, then it will automatically attract a surcharge of 3%.

Mitigation

Virtually all of the items here can be mitigated in some way and we are already taking various steps to help our current clients through various means.

It is not a one stop shop and we tailor our advice for each client. If you would like to discuss any items here, please do contact Geoff Beak or Ben Houston on 01752 665134.

Examples

 

Higher rate taxpayer

 CurrentFuture
Rent received12,00012,000
Other rental costs(2,000)(2,000)
Interest (current)(8,000)-
Profit2,00010,000
Tax due at 40%8004,000
Interest (new rules relief at 20%)-(1,600)
Total tax due8002,400
Effective rate of tax40%120%

 

Basic rate taxpayer – £3,000 short of higher rate

 CurrentFuture
Rent received12,00012,000
Other rental costs(2,000)(2,000)
Interest (current)(8,000)-
Profit2,00010,000
Tax due at 20%400600
Tax due at 40%-2,800
Interest (new rules relief at 20%)-(1,600)
Total tax due4001,800
Effective rate of tax20%90%

 

Loss making higher rate tax payer

 CurrentFuture
Rent received12,00012,000
Other rental costs(2,000)(2,000)
Interest (current)(12,000)-
Profit / (loss)(2,000)10,000
Tax due at 40%-4,000
Interest (new rules relief at 20%)-(2,400)
Total tax due-1,600
Effective rate of tax0%100%

 

The above was based on the full effect of the interest rules when they come into effect in 2020/2021.

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