October 14, 2019 News No Comments

Property, or ‘bricks and mortar’ as a lot of people refer to it, has often been thought of as a “safe” investment, and more so than pensions. Indeed, the private rented sector is ever growing and increased by 1.7 million households between 2007 and 2017. It is also predicted that by 2023, 1 in 4 households will be renting privately.

Growth on property prices have been extremely high over recent decades, however these are now starting to stagnate. Reliefs are now starting to become less favourable for landlords and increased taxes apply, such as:

  • Buy-to-let stamp duty. Since 2016, investors have had to pay an extra 3% in stamp duty on a second property than they otherwise would if the purchase was for their sole property.
  • Capital Gains Tax (CGT). When CGT rates were decreased to 10% for basic rate tax payers and 20% for higher rate tax payers in 2016, the rate applied to residential property remained at 18% for basic rate and 28% for higher rate tax payers.

Reliefs can apply to CGT in some circumstances, such as the Private Residence Relief, however this is changing from April 2020. Previously, where a buy-to-let property has been an investors main residence at some point, then no CGT would be due for the period it was their main residence as well as the final 18 months of ownership. From April 2020, this will reduce to 9 months, rather than 18 months.

It is well known that interest paid on a mortgage can be offset against the income, thereby reducing the potential income tax due at the end of the year. What may be less well known is that this relief has been tapered away in recent years and the introduction of a 20% tax credit against mortgage interest payments has been phased in. This is less favourable for higher and additional rate tax payers, who effectively received a 40% and 45% tax credit respectively.

From April 2020, there will be no mortgage interest deductible and mortgage interest will qualify for the full 20% tax credit.

The table below shows how this will impact on a landlord subject to higher rate income tax receiving £950 rent a month and paying £600 towards their mortgage (interest only).

Tax Year Proportion of mortgage interest deductible under previous system Proportion of mortgage interest qualifying for 20% tax credit under new system Tax Bill Post-tax and mortgage rental income
Pre April 2017 100% 0% £1,680 £2,520
2017/18 75% 25% £2,040 £2,160
2018/19 50% 50% £2,400 £1,800
2019/20 25% 75% £2,760 £1,440
Post April 2020 0% 100% £3,120 £1,080

The changes will affect landlords in different ways. At Eldon we stay up to date with such changes in legislation and can tailor our planning to suit each individual’s circumstances.

Written by Eldon