If the American dream is the rags to riches story, where anyone can achieve their dreams and aspirations, maybe the British dream is simply to own a property. After all, it’s your castle and where your heart is and that’s a complex mix of both wealth and emotion for us Brits to balance.
Considering our obsession with property it comes as no surprise that in 2014 it was estimated one in five homes are now owned by landlords. This is a jump from the mid-eighties estimate of one in ten. No doubt spurred on by the property boom of the turn of the millennium through to 2008.
HMRC have slowly realised that people are making money from property and they’d like it to stop!
What you may have noticed already
As of 6 April 2016, HMRC introduced a higher stamp duty rate for anyone buying an additional property. This is 3% higher than the regular stamp duty tax in each band and applies to any residential property over £40,000 – but excludes caravans, mobile homes and houseboats.
If you are buying your first property, you will pay the regular stamp duty rates regardless of whether this property will be a buy to let. It’s only for people with multiple properties.
What you’ll notice pretty soon
On 6 April 2016, HMRC removed the wear and tear allowance. If you have a furnished buy to let, this was an allowance calculated upon 10% of your gross rental treated as an expense when calculating profits. It acted like a deprecation charge that crucially was tax deductible, to cover the reducing value of the white goods within your property.
Now, you can only claim tax relief if you replace an item. Plus, this is restricted to the cost of an equivalent item if you decide to replace it with something more upmarket. For example, if you had a cheap slot in oven and you decided to replace it with a Range oven, HMRC will restrict the tax relief to the cost of an equivalent replacement slot in oven, plus any costs of disposing the old oven or acquiring the replacement, less any money you have got if you sold the old oven. You aren’t allowed to claim relief on the new Range oven.
So, if you have a furnished property, you may notice your tax bill increasing this year as you won’t have the 10% deduction. You will also want to start keep records of any furniture that you replace and what you replace it with, as now we’ll have to do a couple more calculations.
What will affect you in the near future
With 93% of landlords only having a single buy to let property, the next change will possibly not affect you but for those of you who have a portfolio it could hit you hard.
As things stand, you are able to offset all the finance charges associated with your properties (generally mortgage interest) against your profits. From 6 April 2017, HMRC will begin to restrict the tax relief and by April 2020 only basic rate tax relief will be available. So, if you are a higher rate tax payer and have borrowed in order to build up your property portfolio, this will mean that you cannot use the finance costs against that higher rate band income.
In summary, deductions against your property income will be restricted as follows:
Year % of costs deducted from profits % of costs available as a basic rate deduction
2017/18 75% 25%
2018/19 50% 50%
2019/20 25% 75%
2020/21 – 100%
These tax restrictions will not currently affect you if your properties are owned by a Limited Company. However, there are lots of things to consider that go way beyond short term tax savings if you are thinking of weighing up moving your portfolio over to a Limited Company. That said, if you have a large property portfolio and you are a higher rate tax payer, we highly recommend that you come in for a chat and we can discuss your options going forward. It may be that we need to simply calculate what the tax implications will be, or that we need to review how the properties are funded. But as with everything tax related, it’s best to deal with these things sooner as tax doesn’t treat hindsight with much kindness.