The financial landscape has changed a great deal for those letting residential property, whether it’s a substantial business or a small-scale landlord with one or two properties.
Additional stamp duty
Since 1 April 2016, anyone buying an additional residential property worth more than £40,000 has had to pay an additional 3% stamp duty. The rules are quite stringent and apply whether it is a part share, bought through marriage or civil partnership, or a company, or part of a major acquisition. Tax tip: Replacement of your main dwelling, or purchase of commercial property, mobile homes/caravans, houseboats and some mixed use dwellings does not attract the additional charge.
Withdrawal of wear and tear allowance
6th April 2016 saw the end of the 10% flat rate wear and tear allowance for landlords of furnished residential properties; it was replaced by replacement relief. Landlords now claim for the actual costs of replacing an item provided for use in the let property (the initial purchase doesn’t apply). Whilst this sounds straightforward enough, the devil is in the detail and there are complex rules about what constitutes a replacement or improvement. Tax tip: The new rules are applicable to furnished and unfurnished properties, so don’t miss out because you think it doesn’t apply to you. If replacing an item, make sure you do it before 5 April to gain the tax advantage a full year earlier. Be mindful when upgrading an item that you may not get tax relief on the full cost.
Mortgage interest relief restriction
Since 6 April 2017 residential landlords have seen the tax relief that they could claim be gradually restricted to the basic rate. The measure is being phased in over four years. This delivers a double whammy for landlords of highly geared properties, as not only will tax relief be claimed at 20% rather than 40%, a change in the calculation means many previously basic rate tax payers will be pushed into higher rates of tax. Tax tip: Consider how your debt is structured when mortgages are due for renewal. 20% relief is still better than no relief (for example, on your own home) and lending to a business still attracts tax relief at the highest rate. If you have some flexibility in how you structure your income, consider if you can (legally) bring your top rate of tax down to 20%. Consider if owning properties through a limited company would be more beneficial.
Rent a Room: Earn up to £7,250 tax-free by letting out furnished accommodation in your own home.
Capital Gains Tax: CGT rates for residential property remain at 18% and 28% and from 6 April 2020, a payment on account of the CGT will need to be made within 30 days of completion.