Changing Landscape for Landlords
Three new policy measures will affect buy-to-let landlords, says Laurence Vogel. Here he explains the impact these will have
Buy-to-let landlords have suffered a triple whammy of changes that have been announced over recent months. Two of the changes have already come into effect.
The first change relates to the withdrawal of the wear and tear allowance. Since April 2016, the ‘wear and tear allowance’, that allowed landlords to reduce the tax they paid (regardless of whether they replaced furnishings in their property or not) has been replaced by a new system that restricts the availability of tax relief only to situations where landlords actually replace furniture, furnishings, appliances and kitchenware.
The amount of the available deduction is calculated as follows:
• the cost of the new replacement item, limited to the cost of an equivalent item if it represents an improvement on the old item (beyond the reasonable modern equivalent); plus
• the incidental costs of disposing of the old item or acquiring the replacement; less
• any amounts received on disposal of the old item.
The new rules do not apply to furnished holiday lettings as capital allowances continue to be available.
The second change relates to the introduction of new higher rates of Stamp Duty Land Tax (SDLT) also from April 2016 and applies to purchases of additional residential property such as buy to let and second homes. The new higher rate is 3% higher than the regular SDLT rates (in each band) and applies to the purchase of additional residential properties valued at over £40,000.
The higher rates apply to purchases of additional residential properties in England, Wales and Northern Ireland. The higher rate does not apply to individuals who own only one residential property, irrespective of the intended use of the property. There are also some other limited reliefs from the surcharge. The higher rate of SDLT does not apply to purchases of caravans, mobile homes or houseboats.
There is a similar 3% Scottish Land and Buildings Transaction Tax (SLBTT) supplement for purchases of additional residential properties in Scotland that came into effect on 1 April 2016. The supplement is known in Scotland as the additional dwelling supplement. The Scottish Government added the supplement to their legislation as it was felt that the absence of a similar charge would make it more attractive for investors to buy additional residential properties in Scotland rather than the rest of the UK.
The third and perhaps the biggest of all the changes comes into effect next year. From April 2017, tax relief on mortgage costs is to be restricted and by April 2020 only the 20% basic rate of tax relief will be available. These changes will severely impact many landlords of residential properties who have benefited from tax relief on finance charges, such as mortgage interest for many years.
The reduction in the relief for finance costs for residential landlords will be phased in over four years from April 2017. Deductions from property income as currently allowed will be restricted to:
• 75% of finance costs for 2017-18 with the remaining 25% at the basic rate.
• 50% of finance costs for 2018-19 with the remaining 50% at the basic rate.
• 25% of finance costs for 2019-20 with the remaining 25% at the basic rate.
• From 2020-21 all finance cost deductions will be restricted to the basic rate.
These changes will most acutely affect landlords who have borrowed heavily to grow their portfolios and who are higher rate and additional rate taxpayers. When the changes are fully in place in April 2020, landlords will no longer be able to deduct any finance costs from their property income and will receive only basic rate tax relief.
Finally, while not directly related to tax, new requirements for residential landlords to ensure that a tenant or lodger can legally rent a property have recently come into effect. The new requirements require private landlords, including those who sub-let or take in lodgers, to check the right of prospective tenants to be in the country.
Under the new rules, landlords who fail to check a potential tenant’s ‘Right to Rent’ will face civil penalties of up to £3,000 per tenant. While agents can carry out the checks the onus of complying with the scheme is on the landlord.
The new rules took effect for any tenancy agreement that commences on or after 1 February 2016 in England. The changes are expected to be extended to Scotland, Wales and Northern Ireland in the future.
Over the last number of years, many landlords have significantly benefitted from a buoyant property market in much of the UK. The government and the Bank of England have had concerns that the huge growth of buy-to-let mortgages could adversely affect the UK economy and the government have taken decisive action to temper demand. However, whether these moves to reduce investment by landlords will have the desired effect remains to be seen.
• Laurence Vogel is Head of UK Operations at Informanagement
This article is taken from “Accounting Practice” the ICPA quarterly magazine. Dedicated to supporting and promoting the needs of the general practitioner. You can find us at www.icpa.org.uk or email [email protected] or by phone on 0800-074-2896.