Recent changes to the taxation of buy to let properties will have a substantial impact on landlords.
Land and Buildings Transaction Tax (LBTT)
From 1 April 2016, the Additional Dwelling Supplement imposes an additional 3% ‘slab tax’ on the acquisition of residential property which is not the purchaser’s main residence.
Restriction to Income Tax Relief for Interest Paid
Restrictions to income tax relief for financing costs for residential property apply from 6 April 2017. Under the new rules, rental profits and taxable income will be determined without taking account of interest payments.
The new rules are to be phased in and will apply to 25% of the interest in 2017/18, 50% in 2018/19 and 75% in 2019/20 with 100% of the interest being subject to the new rules from 6 April 2020.
The changes to the tax relief will not just result in a higher rate taxpayer paying additional tax equal to 20% of the interest paid (or 25% if an additional rate taxpayer). The changes may also lead to:
- Tax being paid on rental income when there is a loss, after deducting interest.
- The landlord moving from the basic rate to the higher rate of tax.
- Tax on child benefit if taxable income exceeds £50,000.
- Loss of personal allowance where taxable income exceeds £100,000.
The restriction to tax relief does not apply to companies. For some landlords moving the properties to a company of which the landlord is a director and shareholder may result in substantial tax savings. The transfer may be done legitimately without a charge to capital gains tax or LBTT but only if certain conditions are met. There is a need to act quickly and take advice early to check that incorporation may be achieved without a tax charge, and if, depending on the circumstances of the individual, incorporation is beneficial.
If you have a question about property tax changes, please email our specialist Property Group at firstname.lastname@example.org.