Posts with tag: landlord taxes

Demand for Buy-to-Let to Remain Strong This Year, Believe Brokers

Published On: July 21, 2016 at 9:27 am

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Despite recent tax changes for landlords, many mortgage brokers believe that demand for buy-to-let investment will remain strong during the second half of the year, according to a new study by Legal & General.

Although the Government recently introduced a 3% Stamp Duty surcharge for buy-to-let landlords and second homebuyers, scrapped the 10% Wear and Tear Allowance, and plans to implement a

Demand for Buy-to-Let to Remain Strong This Year, Believe Brokers

Demand for Buy-to-Let to Remain Strong This Year, Believe Brokers

reduction in mortgage interest tax relief, buy-to-let still remains an attractive investment option at a time of low savings rate and stock market uncertainty. Average buy-to-let returns currently beat all other mainstream investments.

Yesterday, we released the Government’s guide to mortgage interest tax relief changes: /government-guide-tax-relief-changes-residential-landlords/

The Legal & General research shows that brokers in Scotland are the most confident in buy-to-let’s future, with 63% of Scottish brokers predicting that the sector will remain the same size as last year in 2016, despite a surge in activity in 2015.

This positivity north of the border is joined by confidence from brokers in Nottingham, where 57% expect the buy-to-let market to either expand or remain the same this year, followed by 49% in London.

However, confidence in the future of the buy-to-let market varies massively across the UK, with a huge 71% of intermediaries in Manchester believing that there will be a reduction in the sector this year.

The Director of the Legal & General Mortgage Club, Jeremy Duncombe, comments: “Despite a whirlwind of changes to the buy-to-let market, including the Government’s Stamp Duty hike and the reductions in tax relief on the horizon, it’s clear that a large number of brokers remain confident that buy-to-let will remain strong in 2016. Though there are concerns that Government interference could mean a reduction in buy-to-let activity this year, our research shows that many brokers in both England and Scotland believe the market to be well positioned to absorb the impacts of these measures.

“Even now, amid the uncertainty brought about following June’s referendum result, borrowers will be looking to remortgage their buy-to-let properties as a potential reduction in rates looms. Brokers need to grasp this opportunity by contacting their books now to ensure these individuals get the crucial advice they need when it comes to securing a better rate on their mortgage.”

Do you believe that the buy-to-let sector will remain strong over the next few months?

The Government’s Guide to Tax Relief Changes for Residential Landlords

Published On: July 20, 2016 at 9:35 am

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Ahead of the phased introduction of tax relief changes for residential landlords in April 2017, the Government has released a guide that explains how the restriction will affect you.

As of April next year, the amount of income tax relief that landlords can claim on residential property finance costs will be cut to the basic rate of tax.

The changes

These changes will affect you if you let out residential properties as an individual, or in a partnership or trust.

The reduction will change how you receive relief for interest and other finance costs, and will be gradually introduced over four years from April 2017.

Under the new rules, finance costs will not be taken into account to work out your taxable property profits. Instead, once the income tax on property profits and any other income sources has been assessed, your income tax liability will be cut to the basic rate. For landlords, this will be the basic rate value of your finance costs.

The Government's Guide to Tax Relief Changes for Residential Landlords

Who will be affected? 

You will be affected by the changes if you are a:

  • UK resident individual that lets residential properties in the UK or overseas
  • Non-UK resident individual that lets residential properties in the UK
  • Individual who lets such properties in partnership
  • Trustee or beneficiary of trusts liable for income tax on property profits

All residential landlords with finance costs will be affected, but only some will pay more tax.

You won’t be affected by the introduction of the reduction if you are a:

  • UK resident company
  • Non-UK resident company
  • Landlord of furnished holiday lets

If you operate as any of the above, you will continue to receive relief for interest and other finance costs as usual.

What does the restriction include?

The finance costs that will be restricted include interest on:

  • Mortgages
  • Loans – including loans to buy furnishings
  • Overdrafts

Other costs affected are:

  • Alternative finance returns
  • Fees and any other incidental costs for getting or repaying mortgages and loans
  • Discounts, premiums and disguised interest

If you take out a loan for both residential and commercial properties, you will need to use a reasonable apportionment of the interest to work out your finance costs for the residential properties, as only the finance costs for the residential property business are restricted. This also applies if your loan was taken out partly for a self-employed trade and partly for residential property.

The introduction 

The changes will be phased in gradually from 6th April 2017 and will be fully in place from 6th April 2020.

As of April next year, you will still be able to deduct some of your finance costs when working out your taxable property profits during the transitional period. These deductions will be gradually withdrawn and replaced with a basic rate tax relief reduction.

You will still be able to use some of your finance costs to work out your property profits and use your remaining finance costs to work out your basic rate tax deduction as follows:

Tax year

 Percentage of finance costs deductible from rental income

Percentage of basic rate tax reduction

2017-18

 75% 25%

2018-19

 50%

50%

2019-20

 25%

75%
2020-21 0%

100%

Other implications of the changes 

These new rules mean that the way taxable income is calculated will change, and that could have other implications for some. For example, if you or your partner receive child benefit and your income is over £50,000, the high income child benefit charge may apply.

These changes were announced in the summer Budget 2015 and are contained in Finance (No. 2) Act 2015, as amended by Finance Bill 2016.

MP Supports Tax Cuts for Private Landlords

Published On: July 4, 2016 at 9:10 am

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MP Supports Tax Cuts for Private Landlords

MP Supports Tax Cuts for Private Landlords

An MP has spoken out in Parliament in support of tax cuts for private landlords, insisting that they should not have been excluded from a Capital Gains Tax (CGT) reduction revealed by the Chancellor in his Budget statement.

Kevin Hollinrake, a Conservative MP and co-founder of Hunters estate agents, believes that George Osborne should not have denied landlords a tax break on their property profits.

Landlords face a hefty 28% CGT bill when they sell their buy-to-let properties, a rate that the Chancellor himself has described as one of the highest in the developed world.

Residential property was deliberately excluded from the tax cut, which will see investors in other asset classes benefit from a reduction from 28% to 20% in the higher rate of CGT, and from 18% to 10% in the basic rate.

Hollinrake is tabling an amendment to Clause 72 of the Finance Bill, which would extend the new 20% CGT rate to private landlords when they sell their rental properties to a sitting tenant.

The motion to put the measure into an amendment to the Finance Bill, which is currently going through Parliament, was originally suggested by the Residential Landlords Association (RLA). The organisation believes that a growing number of landlords are now thinking of leaving the buy-to-let sector, as property investment becomes financially unsustainable for them.

Recent research from the RLA found that a huge 77% of private landlords would consider selling their property to tenants if the rate of CGT was reduced.

The RLA is now urging its members to write to their local MP, encouraging them to back the proposed change to the Finance Bill.

Ahead of the Chancellor’s Budget statement earlier this year, the Royal Institution of Chartered Surveyors also called for landlords to be exempt from paying CGT if they sell their properties to tenants.

A Landlord’s Guide to the Mortgage Interest Tax Relief Changes

Published On: May 30, 2016 at 8:03 am

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Many buy-to-let landlords are set to see their profits decline after Chancellor George Osborne revealed plans to reduce mortgage interest tax relief in the summer Budget.

At present, landlords can reduce their taxable income by deducting the cost of certain expenses from their rental income. Until now, these allowable expenses have included costs such as repairs, letting agent fees and mortgage interest.

Under the new rules, landlords will still be able to deduct repairs and other legitimate expenses from their taxable income, but will only be able to offset a portion of their mortgage interests costs against tax, if they are a higher rate taxpayer.

Example

To demonstrate exactly how this will work, London estate agent Portico has calculated the impact of the change for a higher rate taxpayer. The firm assumes that they purchased the property for £500,000, are renting it out for £400 per week, and have a 75% loan-to-value (LTV) mortgage with a 3.5% interest rate.

A Landlord's Guide to Mortgage Interest Tax Relief Changes

A Landlord’s Guide to the Mortgage Interest Tax Relief Changes

Under the new rules, this landlord would end up being £2,625 worse off, with their profits falling from £4,000 to little over £1,000.

Although there is no doubt that this change will make things more difficult for landlords, the majority of buy-to-let investors will not be affected quite as severely as this example, explains Portico.

To begin with, landlords that are still classed as basic rate taxpayers after the changes are introduced will not be affected at all.

Secondly, most landlords have a lower LTV than 75%. Additionally, landlords in London have enjoyed substantial capital and rent price growth in the past decade. This means that interest payments represent a much smaller proportion of rental income than shown in the example above. Therefore, landlords with lower mortgage costs will lose less under the change.

Another bit of good news is that the change will be phased in gradually. In the current tax year (15/16), there will be no change at all. The tax change will begin with four equal increases over the next four years. For the example above, this means that the landlord will be unaffected this financial year, around £650 worse off next year, £1,300 the year after, £2,000 the year after that, and finally £2,625 by the time they pay their tax bill at the end of 2021.

Putting it simply, the current rules give most landlords a 40% discount on their interest costs. Under the new system, this drops to 20%.

Portico advises landlords to cut their interest costs by remortgaging.

With buy-to-let mortgage interest rates falling significantly since the financial crisis, current deals are substantially better than those arranged a few years ago.

Portico also suggests having your rental property re-valued to take house price growth into account. This would make your mortgage lender recalculate your LTV, and a lower LTV means a better interest rate.

Ahead of the tax change, ensure that you protect your rental income with Rent Guarantee Insurance, which covers rent payments if your tenants fall into arrears.

A Landlord’s Guide to the 3% Stamp Duty Surcharge

Published On: May 29, 2016 at 8:06 am

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As of 1st April 2016, buy-to-let landlords and second homebuyers are charged a 3% Stamp Duty surcharge on additional residential dwellings.

The measure forms part of a series of policies introduced by the Government to crack down on landlords.

The additional 3% Stamp Duty charge could represent a significant extra cost to buy-to-let landlords, which may affect the economic viability of future property investment.

What types of property are affected? 

Although we might think we know what a residential dwelling is, it is worth noting that this also includes buildings that are in the process of being adapted for use as a dwelling, off-plan purchases and holiday homes. Commercial properties are, however, unaffected by the surcharge.

What are the other conditions? 

The additional Stamp Duty charge will generally apply to residential property purchases if:

  • The purchase price is £40,000 or more.
  • The purchaser already owns another residential property with a market value of £40,000 or more.
  • The dwelling being purchased is not replacing the purchaser’s only or main residence.

As a result, the surcharge will apply to most residential property acquisitions by landlords. There are some limited exemptions for properties purchased whilst subject to a lease with more than 21 years to run, but these cases are rare.

A Landlord's Guide to the 3% Stamp Duty Surcharge

A Landlord’s Guide to the 3% Stamp Duty Surcharge

What else do I need to know? 

The rules surrounding the additional charge are complex, but here are some points you should know:

  • If a property is purchased jointly (by a married couple, for example), the additional Stamp Duty charge will apply to the whole transaction if one of the purchasers, when considered individually, would be caught by the change.
  • Some instances, when someone might not expect to be caught, can still fall within the rules. For example, if an individual owns one or more rental properties but is now acquiring a residential property as their home, unless they dispose of all properties before the purchase, the 3% surcharge will apply.
  • Contrary to previous claims, limited companies owning more than 10 properties will be hit by the charge.

Can I reduce the impact of the surcharge?

Certain purchases will fall outside of the rules, but this will mostly be limited to replacements of main residences. This requires disposing of the replaced property, within a period of three years of the acquisition, preventing landlords from hopping between homes to avoid the surcharge.

However, some reliefs are also available:

  • If more than one property is purchased in a single transaction, multiple dwellings relief may be available, which ensures that the average cost is used when calculating the Stamp Duty charge. Although the 3% surcharge will still apply, this method can significantly reduce the cost.
  • Sometimes, the potentially lower commercial rates of Stamp Duty can apply. This includes acquisitions of mixed-use properties (such as flats above shops), purchases or more than six individual dwellings in one transaction, and certain linked purchases where a commercial property is purchased alongside a residential dwelling.

There are other options available, however, it is always a good idea to seek advice on the best way to structure your property transaction.

For an example of how much the 3% surcharge will hit landlords, look at the calculations below:

If a homeowner with a single dwelling were to purchase a £300,000 property, they would be charged Stamp Duty in the following way:

0% on the first £125,000 – £0.00

2% on the next £125,000 – £2,500.00

5% on the final £50,000 – £2,500.00

= £5,000.00

If a buy-to-let landlord bought the same property for £300,000, they would be charged as such:

3% on the first £125,000 – £3,750.00

5% on the next £125,000 – £6,250.00

8% on the final £50,000 – £4,000.00

= £14,000.00

This represents an additional £9,000 in Stamp Duty for the landlord, or an increase in the tax of around 200%.

Remember to seek financial advice if you are unsure of how the tax change will affect you.

Preparing for Future Economic Changes in the Buy-to-Let Sector

Published On: May 21, 2016 at 8:17 am

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The Government’s clampdown on the buy-to-let sector will continue into next year, alongside economic changes that will have an effect on the property market. How should you prepare for any financial difficulties you may face?

Just next month, the country will vote in its first European referendum since 1975. It is believed that the EU vote will cause house prices and sales to drop, due to uncertainty in

Preparing for Future Economic Changes in the Buy-to-Let Sector

Preparing for Future Economic Changes in the Buy-to-Let Sector

the market. However, property professionals have called for a Brexit in a recent poll.

So should you continue to invest in property at this volatile time?

Nova Financial’s Managing Director, Paul Mahoney, explains: “Our advice to our clients is that property is a long-term investment and therefore isn’t about timing the market, but rather time in the market.

“All too often we meet with people in their 60s who have always had a reason not to invest, whether it’s a property bubble, tax changes, Brexit, Easter or Christmas, and unfortunately, these tend to be the people with little to no investable asset base, because they’ve always had a reason to wait. Those that invest in quality properties in areas with strong fundamentals ride out the short-term blips and achieve strong growth over the mid to long-term.”

He adds: “My point is that regardless of the EU referendum outcome, property will remain a strong investment over the long-term and it should not stop people from positioning themselves to take advantage of that fact.”

Additionally, many landlords are considering forming limited companies to avoid the gradual reduction in mortgage interest tax relief, from April 2017.

The latest data from mortgage lender Foundation Home Loans claims that landlords will favour limited company mortgages in the future, as this type of property business will be exempt from the cut in how much tax relief landlords can claim against mortgage interest payments.

Mahoney comments: “We have been advising on and forming limited companies for many of our clients, given the recent tax changes. When running the numbers and accounting for a slightly higher interest rate payable for limited company buy-to-let mortgages, we find that it is certainly worth considering for anyone on the highest tax rate with mortgage loan-to-values above 50%. This affects anyone earning over £43,000 per annum currently and £45,000 as of next year. Those that are borderline on the threshold need also be careful, as if they are landlords receiving rental income, the recent changes may push them above the bracket. It is very important to seek tax advice on this matter and if they haven’t already, all landlords and prospective landlords should be getting personal advice.”

If you are thinking of investing in the buy-to-let sector, or are considering changing your business model, remember to seek professional advice from a leading expert.