Buy To Let Investment in 2016 and beyond – Is it still for me?
The changes to the tax treatment of Buy-To-Let properties in the 2015 Autumn Statement came as a huge surprise to most people. The announcement was far from clear, but once the details were looked into, it was apparent that the changes would have a wide and significant impact on the UK Buy-To-Let market.
The main changes are:
- The levels of stamp duty on second homes and buy-to-let properties
- The treatment of mortgage interest deductions from rental income
- When you are taxed when selling a buy-to-let property
- The abolishment of the 10% wear and tear allowance for furnished buy-to-let properties.
To help you get your head around it all, we have explained the changes in each of the four areas below.
Stamp Duty Changes
At present if you buy a residential home you pay stamp duty at a progressively-applied rate which depends on the value of the property. You pay nothing on the first £125,000, then at each of four value thresholds a higher rate of tax is applied on the portion of the price above that level, up to 12 per cent on anything above £1.5m.
From April 2016 anyone buying a second home or buy-to-let property will pay a 3 per cent surcharge on their stamp duty bill.
|Property value||Standard rate||Buy-to-let/second home rate from April 2016|
|Up to £125,000||0%||3%|
|£125,000 - £250,000||2%||5%|
|£250,000 - £925,000||5%||8%|
|£925,000 - £1.5m||10%||13%|
This in itself is a significant extra cost to consider when buying a second home or considering a buy-to-let investment.
Mortgage Interest Deduction Changes
Currently, landlords can deduct mortgage interest from their rental income before they calculate the tax they owe. So if you earn £20,000 a year from your buy-to-let property and your mortgage interest costs £13,000 a year, you would only pay tax on £7,000.
That’s a tax bill of £1,400 for basic-rate payers (£7,000 x 20%), £2,800 for higher-rate taxpayers (£7,000 x 40%), and £3,150 if you are an additional rate taxpayer (£7,100 x 45%).
Over three years - starting in 2017 - the amount of mortgage interest tax relief landlords can claim is reduced year by year until no mortgage interest can be deducted calculating your tax bill. Instead you will receive a tax credit equivalent to 20 per cent basic-rate tax on this amount.
Going back to the example above, you’ll now owe tax on your entire £20,000 rental income. You will, however, get a 20 per cent tax credit for the £13,000 interest element, giving you back £2,600. So if you are a basic-rate taxpayer your £4,000 bill would be reduced to a net £1,400 - the same as you pay now.
But if you are a higher rate taxpayer you will eventually (in 2020) have to give the taxman £5,400 - an £8,000 initial bill minus the same £2,600 tax credit. And additional rate taxpayers would hand over £6,400.
So, interest rates wouldn’t have to increase by too much before higher and additional rate taxpayers would be left making no money at all after tax.
Changes to when tax is due when selling a buy-to-let property
Landlords are also facing a change to the way they pay tax when they sell their buy-to-let properties. At present, capital gains tax isn’t due until the end of the tax year but from April 2019 landlords will have to pay their capital gains bill within 30 days of selling a property.
Wear and Tear Allowance
As well as these huge tax blows, the 10% wear and tear allowance for furnished properties will also be abolished from April 2016 onwards.
So, is a Buy-to-Let investment still a good option?
Firstly, it’s worth mentioning that these rule changes may be amended or changed before being implemented if the various landlord groups make enough noise. However, for the time being we need to assume that they will be implemented as stated above.
As proposed now, every buy-to-let investor’s tax bill will shoot up - some investors could end up paying tax on a property that in reality is loss-making.
So with all this bad news, is buy-to-let still a good option? Should you think of selling your current buy-to-let properties, or abandon thoughts of moving into it for the first time?
This is not a decision to be made lightly, but it is one to discuss with your accountant or business advisor.
Whilst the profits made from buy-to-let investments will fall following these changes, the large majority of investments will still be profitable and will compare very favourably with leaving your money in a saving account that is earning you close to zero interest. Whilst there is talk in the media of house prices falling in the short-term as the housing market becomes saturated with hundreds of thousands of buy-to-let properties being put back on the market, the reality is that there will always be a big demand for rental properties as demand for housing in the UK is still way short of supply. Therefore any investment in property over the medium and long term is still likely to be a profitable one
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