Stamp Duty Land Tax Changes
Higher rates of stamp duty land tax (SDLT) on purchases of additional residential properties are expected to be finalised for the Spring Budget (16 March 2016). This is therefore expected to impact upon Private Landlords, or those looking to buy investment properties in the near future.
The changes are as follows:
|Property Price||Current Rate||Proposed Rate|
|Up to £125,000||0%||3%|
|£125,000 to £250,000||2%||5%|
|£250,000 to £925,000||5%||8%|
|£925,000 to £1,500,000||10%||13%|
|£1,500,000 or more||12%||15%|
If you are therefore considering purchasing a second property, you should make yourself aware of the potential extra costs involved before proceeding. Alternatively, if you are in the process of buying a second property, you may wish to ensure it completes as soon as possible to avoid any unexpected costs.
No Tax Relief against Borrowings
The Finance Bill has revealed an unwelcome twist to the Budget changes. The July 2015 Budget announced two changes to buy-to-let rules. The first was relatively straightforward:
A switch from a notional 10% wear-and-tear allowance for furnished lets to one based on actual expenditure incurred. The second was more complex: a four year phasing down of the tax relief on finance costs (primarily interest) to basic rate only by 2020/21.
Experts have highlighted that this move is not going to be as simple as it may initially look. The basic rate relief is to be given as a tax credit, not as a deduction against rental income which is how interest relief (and expense relief) currently operates. What it will mean is, from 2017/18 onwards buy-to-let owners will see their total income figure increase until, in 2020/21, the whole of their rental income (less other expenses), is added to their other income.
This could have some unfortunate consequences. For example, it might add enough to the individual’s overall income to mean they cross the £50,000 threshold at which Child Benefit is taxed. Or the £100,000 level at which the personal allowance starts to be phased out. Also, it might push up an individual’s marginal tax rate. The biggest effect, though will be for those buy-to-let investors who are most highly geared, and therefore (at present) have little or no taxable income from their property after deducting interest and expenses.
The obvious escape route is to adopt the approach used by most large buy-to-let property investors and use a corporate wrapper rather than own property personally. The new rules announced by the Chancellor do not apply to companies, but the corporate route has other drawbacks.
Many buy-to-let investors are unaware of just how much difference the change to interest relief will make.
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