Last week the Bank of England turned up the heat on Landlords.
The Bank of England expressed concerns about Buy-to-Let Investment and lending levels. New rules have been proposed that aim to tighten requirements for landlords involved in investment properties and limit the amount that can be borrowed for these types of endeavours.
This reaction comes from recent suggestions that mass buy-to-let property management could have a destabilising effect on the UK economy.
The rules put a spotlight on lenders, encouraging them to require more extensive financial information from the potential landlord before granting a mortgage.
The requirements go beyond ensuring the rental income of the property is significantly higher than the mortgage payments (the income coverage ratio), to also considering an individual’s overall financial situation.
The Prudential Regulation Authority (PRA) – an arm of the Bank – has recommended that banks and building societies take account of:
- all the costs a landlord might have to pay when renting out a property
- any tax liability associated with the property
- a landlord’s personal tax liabilities, “essential expenditure” and living costs.
- a landlord’s additional income – where this is being used to support the borrowing. This income should be “verified”.
If adopted, the new rules could reduce lending to landlords by up to 20% over the next three years.
Landlords have already been hit but tax changes…
Buy to Let Stamp Duty
|£125k to £250k
|£250k to £925k
|£925k to £1.5m
A 3% surcharge on stamp duty when some buy-to-let properties and second homes are bought will be levied from April 2016.
This means it will add £5,520 of tax to be paid when buying the average £184,000 buy-to-let property. The new charge would have hit 160,000 buyers if it had applied last year.
But, commercial property investors, with more than 15 properties, will be exempt from the new charges.
Stamp Duty on Selling Shares is 0.5% so why aren’t more investors buying property into companies and then selling the shares in the company!
Mortgage Interest offset against property income will be restricted
75% of the interest can be claimed in full and 25% will get relief at 20%
50% of the interest can be claimed in full and 50% will get relief at 20%
25% of the interest can be claimed in full and 75% will get relief at 20%
100% will get only 20% relief
For a 20% tax payer that’s fine but for higher rate taxpayer it’s a disaster that will lead to them paying a lot more tax
These rules will not apply to Companies, Companies will continue to claim full relief.
From April 2016, the higher rate of Capital Gains Tax will be cut from 28% to 20% and the basic rate from 18% to 10%.
There will be an additional 8% surcharge to be paid on residential property.
Capital Gains Tax on residential property does not apply to your main home, only to additional properties (for example a flat that you let out).
Wear & Tear
Landlords have been used to claiming 10% of rental income as a tax deductible wear and tear allowance, but that will change in April 2016.
The Wear and Tear Allowance for fully furnished properties will be replaced with a relief that enables all landlords of residential dwelling houses to deduct the costs they actually incur on replacing furnishings, appliances and kitchenware in the property.
The relief given will be for the cost of a like-for-like, or nearest modern equivalent, replacement asset, plus any costs incurred in disposing of, or less any proceeds received for, the asset being replaced.
What could a Property Investor do to reduce the impact of these changes?
- Incorporation – could you save money by incorporating your residential investments, would you qualify for incorporation tax relief
- Pension Contributions – Pension Contributions currently receive tax relief at your rate of tax – 20% to 45% – so if you are a 40% tax payer you would need pay half the value of your 20% restricted interest into your pension to mitigate the extra tax
- Change of Use – would your Buy to Let be able to be converted to a Furnished Holiday Let? or another type of commercial property on which the interest restriction won’t apply
- Increasing the Rent – Could you charge more to cover the extra taxes?
- Spouse Income Tax Elections – If the property is jointly held HMRC assume a 50/50 split of the income but you can change that using Form 17 this might be useful if one of you is a basic rate taxpayer and the other a higher rate taxpayer
- Tax Deductible Expenses – Many landlords overlook expenses at the moment but they could become a lot more important, for example, use of your home, motor expenses, computers, travel and subsistence, phone costs etc