4 Things you need to know about 'Buy to Let' changes
1. Stamp duty
Any investment properties purchased in the future will be subject to an extra 3% Stamp Duty for Second Properties. This does not apply to limited companies, or the purchase of caravans or mobile homes.
2. Deductions for finance costs phased down
You will no longer be able to claim mortgage interest for the property or interest for loans to buy furniture or do major repairs. This is being phased down so that by 2020 interest will not be an allowable expense.
2017/18: 75% of finance costs can be claimed 2018/19: 50% of finance costs can be claimed 2019/20: 25% of finance costs can be claimed 2020/21: 0% of finance costs can be claimed
There will be an additional 20% tax relief on a percentage of the finance costs on a sliding scale as well.
However, the above does not apply to limited companies or Furnished Holiday Lets.
A 40% tax payer has a buy to let property as an investment, and as they have owned the property for some time, the outstanding debt on the property is very low.
Gross Rent 7,200 7,200 Repairs and other costs -1.000 -1,000 Interest on mortgage -2,500 -0 Net rental Profit 3,700 6,200
Tax at 40% 1,480 2,480 Less interest relief at 20% on £2,500 0 -500 Net Tax liability on rental income 1,480 1,980
Tax increase 500
However, if they decided to increase their borrowings to buy a second buy to let property , they would see his tax rise further still.
Tax planning options • Incorporating and transfer property and loans – speak to us if you would like to know more about this. • Switch to Commercial properties • Sell up • Increase rent
3. Removal of wear and tear allowance
From April 2016, the wear and tear allowance will be replaced by the cost of replacing flooring, furnishings, curtains, crockery, and white goods being an allowable deduction.
However, this does not apply to the original cost of buying furniture when the property is first let.
This applies to furnished, unfurnished, and partly furnished residential properties. It does not apply to Furnished Holiday Lets or Commercial properties as they get relief via capital allowances.
Any element of the replacement asset that represents an improvement would be excluded from the replacement cost. For example, if a washing machine was replaced with a washer/dryer and the new washer/dryer cost £600 but replacing the washing machine like for like would have cost £400 then the extra £200 would be disallowable and only the £400 could be claimed.
Tax planning options
• Delay the replacement of furniture and fittings until after 6th April 2016
4. Capital gains tax payment
If you decide to sell your investment property, it will be subject to Capital Gains Tax.
Currently, the Capital Gains tax bill was not payable until the following 31st January.
The government has announced that it intends to reduce this payment window and Capital Gains Tax will have to be paid within 30 days of the completion of the sale.
This does not apply to your main property where you live – no capital gains tax is payable on this.
Speak to Selena at S J Baker Accounting if you would like to explore any of the above options. Tel: 01793 495559 or email firstname.lastname@example.org.