Many of our landlords have expressed serious concerns as to the viability of their investments with so many recent landlord tax changes impacting buy to let properties. It is hard to keep track, so we have summarized below some of the most impactful changes. Ultimately it is vitally important that each landlord seek tax advise to directly calculate the effects on their holdings.
Phase Out of Mortgage Interest Relief
Effective April 2017, HMRC began a 5 year phased reduction of mortgage interest deduction on BTLs. The changes will most hit higher rate tax payers the most as it will limit deductions to a flat 20% of mortgage interest paid. The example below shows that for a landlord in the 40% tax bracket earning £10,000 per annum in rental income net profits will whittle down from £1800 to just £800.
Additional 3% Stamp Duty
When the additional 3% stamp duty tax on second properties took effect April 2016, new BTL borrowers plummeted from 29,000 in March 2016 to 4,200 the following month and has failed to recover since. Though it has made the cost of moving home much more costly for those with existing homes or landlords, the government does not show signs of reconsidering this levy given its net intake on stamp duty has increased while transaction volume has stagnated.
Removal of Wear and Tear Allowance
Prior to April 2016 landlords were permitted to deduct a standard 10% of net rent as a wear and tear allowance on their furnished properties. The deduction could be applied whether or not they replaced any furnishings, fixtures or fittings or repaired the property. Now landlords can only deduct actual costs spent on repairs.
Higher Stress Test for Mortgage Affordability
In June 2017 the government put in place stringent new rules to force lenders to apply higher standards to access affordability on the part of borrowers. Lenders will now have to stress test a borrower’s ability to pay increases on mortgage rates at 3 percentage points above the rate that will apply when the introductory offer ends.
While all of these changes have made owning buy to let properties more costly, it still presents opportunities for those buying. Smart landlords are consulting with their tax advisors to assess the impact of the tax changes outlined above. We at Onyx Property Consultants are happy to refer you to our tax partners who can discuss your specific situation. We can also assist if you are looking to buy, sell or have properties to manage. Get in touch today.