Campbell Dallas: Buy to let owners tax changes

Campbell Dallas

 

Buy to let owners need to start preparing for new tax changes

A series of changes announced in the most recent UK and Scottish Budgets look set to have a significant impact on the buy to let sector. The new 3% LBTT supplementary charge, restrictions on tax relief for interest on property-related loans and the replacement of the Wear and Tear allowance will result in many residential landlords facing significantly higher tax bills.

The 3% LBTT supplementary charge

The Land and Buildings Transactions Tax (LBTT) Supplement was announced by the Scottish Government in its December 2015 Budget. The Supplement will apply to individuals (or couples) when they purchase an additional residential property to let or use as a second home. The charge is a flat rate equal to 3% of the purchase price (or market value if higher). This surcharge is in addition to the standard rates of LBTT payable. The new charge will come into effect from 1 April 2016. The table below illustrates the additional LBTT liability on purchasing an additional residential property after 1 April 2016:

campbell dallas grid - march april 16

 
 
 
 
 
 
 
 
 
 

Restriction of interest relief on property related loans

From 6 April 2017 only a percentage of property related loan interest paid will be deductible against rental profits. The remainder is then treated as a tax reducer but only at a rate of 20%. Therefore, landlords who are higher rate tax payers will not receive full relief for their mortgage interest. In addition, taxpayers currently paying tax at the basic rate band may now be drawn into the higher rate band due to the loan interest not being a deductible rental expense.

The percentage allowable in the 2017/18 tax year is 75% but this will be reduced each year so that by the 2020/21 tax year no mortgage interest will be directly deductible against rental profits and all relief will be achieved via the 20% tax reducer. For higher rate taxpayers this will mean that effectively only 50% of their mortgage interest will receive relief.

Replacement of the 10% wear and tear allowance

From April 2016 landlords who let furnished residential properties will no longer be able to claim the Wear and Tear allowance which allows 10% of the rent each year to be treated as a deductible furnishings expense. Instead they, together with landlords of unfurnished properties, will be able to claim a new tax relief for the capital cost of replacing furnishings provided to the tenant. This includes items such as TVs, beds, sofas and carpets but no relief can be obtained for the initial costs of furnishing a property.

Could Incorporation mitigate these new costs?

The new loan interest rules apply to individuals and partnerships but not to companies so incorporating your buy to let business may be a viable alternative. However, on the flip side, the changes to the taxation of dividends from 6 April 2016 may feasibly result in a higher tax charge when you choose to extract the profits. Whether incorporation is the best option for you will depend on your personal circumstances and need for income and should be discussed with a professional tax adviser.

To discuss how these tax changes could impact your buy to let business, including your tax planning options or if you have any general tax questions, contact Aileen Gates at aileen.gates@campbelldallas.co.uk or telephone us on 0141 886 6644

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