Buy to Let investments have over the last 20 years been an alternative for many investors to the more traditional methods of accumulating money for retirement. It has also provided properties for those wanting to rent, rather than purchase property, especially as higher property prices have excluded many from becoming owners. I don’t want to discuss the political or moral issues surrounding this, but to focus on the recent changes to the tax rules and whether this method of investment is still worth while?
Mortgage interest relief
Landlords have historically been able to deduct mortgage interest from their rental income as an allowable expense. Starting from the tax year 17/18 this relief is being phased out. In 17/18 25% of the interest is disallowed, and this increases to 100% of the mortgage interest in the tax year 20/21. Note the capital repayment part of the mortgage has never been an allowable expense.
So the idea that your tenant will pay your mortgage is no longer a valid assumption and except for the more direct costs of the property ownership, your rental income will be chargeable to income tax. Although the yield on property rental may still be much higher than alternatives such as bank deposit accounts, the most significant offset again your income will now not be allowable. It will be interesting to see how this will impact the rental market and the willingness of banks and other financial institutions to lend funds to the sector?
Stamp Duty on the purchase of an investment property
Since April 2016 an investment property, or an additional home to your principle private residence (PPR) has suffered an extra 3% stamp duty charge over and above the stamp duty based on the property’s value. For example an average 3 bedroom property costing £280,000 would have a normal stamp duty cost of £4,000. But the additional 3% charge would increase the investor’s cost by a further £8,400.
This has a significant impact on the yield from the investment, and unless the investor can acquire the property at a cost lower than its market value, it will deter many from investing.
Capital Gains Tax on the disposal of the investment
Many people have rented out a property that was previously their principle private residence. This may be due to circumstances such as having to move location due to work and not being able to sell your property, or in some cases a deliberate strategy to gain PPR relief. Originally the rule for a property that was used for both purposes, was that the eventual capital gain could be time apportioned, reducing the amount of capital gains tax payable. The current HMRC rules have significantly reduced the amount of the capital gain that can be offset. Please refer to our blog https://www.helpfulbeancounter.co.uk/principle-private-residence/ for more details on the changes.
Adding a spouse to an investment property
It may be advantageous to share the investment property income with your spouse. Unfortunately, if the person is added to the property it will still be subject to the stamp duty rules, and therefore liable to the 3% charge even is the consideration (price) is below the basic stamp duty threshold of £125,000. Although the consideration for the share of the property is between the parties and does not have to be at fair value, the value of the outstanding mortgage will dictate the lowest value for stamp duty purposes. Therefore a property with a market value of say £300,000, with a mortgage of £250,000, would still create a stamp duty liability of £125,000 @ 3% of £3,750.
The above are the views of the Helpful Bean Counter and are provided to help our clients and those considering using our services. This is a complex area and we are willing to provide a free short consultation to discuss your tax position.