Buy-to-let investments have been a great source of income especially with fluctuations in stock market prices and declining interest rates. However, some changes in the UK property market, especially on taxation is likely to reduce the income that landlords get from these properties.
Buy to let homes have been better income investments for those capable of raising a large deposit, than those in low savings rates and those experiencing falling stock market prices. The decline in mortgage rates has also been another motivation for going for buy-to-let investments.
However, there is more and more restrictive taxation that is reducing the benefit from buy to let properties. Although there is still a chance of making a decent return even after considering the incumbent tax bill, investors should still consider whether the returns are worthwhile. The trick is to invest in UK property in a decent location with good tenants.
Buy To Let Taxes
The law requires landlords to declare how much they make from rent and any capital income after selling property. There is going to be a distinction between residential mortgages and buy to let mortgages. This mortgage will be a separate product from the one you get for your home. The lender will also have records of whether you are renting the home or living in it. Residential mortgage does not permit renting of the property, and this is only allowable under a buy-to-let rate. The rate for this kind of mortgage is higher than for residential ones because of the dependency on income from tenants and the risk associated with it.Buy-to-let is an investment which is subject to tax on rent and any gains on sale. There is also a stamp duty rate on the purchase of the property. Details are as follows:
Stamp duty is the initial tax that comes due when you obtain your buy to let property. The proposed rate for stamp duty is 3 percent, and this will take effect from April 2016. The tax law will change from the current requirements where the first £125,000 is tax-exempt. The next £125,000 attracts a 2 percent stamp duty, and anything between £250,000 and £500,000 attracts a 5 percent stamp duty; with a higher rate for each bracket.The proposed stamp duty rises to 3 percent for property from £40,000 to £125,000, 5 percent for homes to £250,000, and 8 percent for those between £250,000 and £500,000 from April 2016. You can read more about the new stamp duty levels here.
Any rent from buy to let will attract income tax. In addition, the owner of the property needs to declare this income while completing the self-assessment for tax purposes. The income tax rate with subsequently depend on your tax bracket which can either be 20, 40 or 45 percent.
You are only exempt from tax on allowable expenses such as interest to acquire the property. However, there is likely to be a change in this benefit to limit the tax relief to only 20 percent from the current 45 percent from April 2017.
Capital gains tax
This tax arises when you sell the property and make profit on the sale. The profit is then taxable for any amount above the annual allowance of £11,500 for individuals, and £22,000 for married couples and civil partners. Capital gains tax is at 18 percent for basic rate payers and 28 percent for higher rate taxpayers.
Declining Relief From 2016
Chancellor George Osborne is behind these tax changes which he announced in his 2015 budget. They purpose to lessen the tax reliefs that landlords get on buy to let properties. He proposes scraping of the wear and tear allowable expense that lowers income tax for landlords. Before April 2016, landlords can claim this allowance even without incurring any expenses on their properties. However, from April 2016, only the incurred costs will be an allowable expense. In addition, the allowance on finance costs such as interests will not be deductible from property income from April 2017. Instead, there is a proposed basic rate reduction from the income tax to cater for the finance costs. There has obviously been an outcry from landlords with Cherie Blair even stepping up to fight the new tax law.