tax – Glastonbury Property News

In his autumn statement George Osborne sent shockwaves through Mid-Somerset landlords when he announced that private landlords buying another property from April 2016 will have to pay an additional 3% stamp duty on top of the standard rate. This has led some Mid-Somerset landlords to question the future viability of buy-to-let as an investment.

As an example if you were to buy a buy-to-let property for £275,000 today your stamp duty bill will be £3,750. After April 2016 your stamp duty bill for the same property will jump to £12,000. I anticipate the immediate impact of this will be a rush amongst Mid-Somerset buy-to-let investors wanting to complete their purchase before the change takes effect in April.

One school of thought is that there will be downward pressure on property prices in Mid-Somerset as buy-to-let investors will not be willing to pay as much. This may come as good news for those willing and able to buy their first property. However before first time buyers break out the bubbly we may need to consider if house builders or existing homeowners don’t feel they are going to get as much for them, then there is less motivation to build or sell them. The person to thank for this is George Osborne.

Back in 2012, George Osborne chose to utilise the housing market to kick-start the UK economy with subsidies such as Funding for Lending and Help to Buy. However, whilst that helped the re-elect the Tory’s in 2015, some say this impressive growth in the UK property market has been at the expense of pricing out first time buyers.

Others say this announcement is the straw that broke the camel’s back, as over the next four years buy-to-let landlords in Mid-Somerset will slowly lose the ability to offset all their mortgage interest against tax on rental income, after changes announced in the Summer Budget. At the moment, landlords can claim tax relief on buy-to-let mortgage monthly interest repayments at the top level of tax they pay (i.e. 40% or 45%). However, over the next four years this will be reduced slowly to the basic rate of tax – currently 20%.

Is this the end of buy-to-let investment in Mid-Somerset? Possibly – but before we all hit the panic button and run for the hills let me give you another scenario to consider.

Stamp duty rules were changed in December 2014. Before then, buy-to-let landlords in Mid-Somerset were eagerly buying up properties under the old ‘slab style’ stamp duty system.

For example, the stamp duty bill on that £275,000 property was lower under the old slab style duty (pre Dec 2014), at £8,250 yet it isn’t a million miles away from £12,000 stamp duty bill under the soon to be introduced stamp duty regime.

Interestingly though, George Osborne has left a loophole in the new rules, because when it comes to selling up, investors can offset purchase costs against any Capital Gains Tax liability including stamp duty.

I believe that total returns from buy-to-let investment in Mid-Somerset will continue to outpace other investments such as the stock market, gilts, bonds and even pensions.

Also, the best part about investing in property is that it is bricks and mortar.

You can touch it, you can feel it, and it isn’t controlled by some stockbroker in Canary Wharf. The British love property and understand the benefits of investing in bricks and mortar.

Buy-to-let has enough impetus behind it that prospective buy-to-let investors in Mid-Somerset will continue to buy even with a larger stamp duty bill.

More than ever Mid-Somerset buy-to-let investors will need to be careful with what properties they buy, to ensure the extra stamp duty costs are mitigated.

Buying buy-to-let property is a long-term venture. In the past, it didn’t matter what property you bought in Mid-Somerset, or at what price – you would always make money.

With recent changes in legislation and forthcoming changes in taxation the idea that any property will make you money has been blown out of the water.

You wouldn’t dream of investing in the stock market without doing some research or getting expert advice so make sure you do the same before investing in buy-to-let in Mid-Somerset.

About Tom Morgan

Founder of Jungle Property the multi award-winning letting agent based in Glastonbury, Somerset. I am passionate about property and Glastonbury and about providing the very best advice to anyone who wants the best return on a buy-to-let property investment. For an open and brutally honest opinion on anything in the Glastonbury property market please contact me via tom.morgan@jungleproperty.co.uk

Chancellor George Osborne recently announced new rules from 2017 restricting tax relief on mortgage interest to the basic rate, currently 20 per cent.

The limits on mortgage interest relief only apply to individuals. Tax relief on mortgage interest was an attractive perk of buy-to-let. A higher rate taxpayer can get 40 per cent relief, but from 2020 will see that halved to 20 per cent. Landlords will be taxed on their rental income not their profits.

A company only pays tax on its profits whereas an individual pays tax based on their income and companies pay a lower tax rate than individuals. Corporation tax is currently 20 per cent and is due to drop to 18 per cent by 2020.

Landlords could look to preserve some of their profits by setting up companies instead, but experts warn this would be costly for those with just one or two properties. There will be tax charges such as stamp duty and capital gains tax (CGT) that could be incurred when moving property into a company. If an individual transfers their property into a company they set up, there would be deemed as a market value disposal for CGT purposes. If your buy-to-let property has gone up in value since you acquired it, you would have to pay CGT of up to 28 per cent. Also, transferring a property into a company will give rise to a stamp duty liability.

How much tax will landlords pay?
Landlords pay income tax on rent that they receive. The amount paid is determined by their income tax band. A basic rate taxpayer pays 20 per cent, while a higher rate taxpayer pays 40 per cent and tax is 45 per cent for additional rate taxpayers. Income from rent is added to personal income from other sources to decide the tax rate.

However, landlords can currently claim relief for interest on buy-to-let mortgage payments, allowing them to offset their mortgage interest against rental income and only pay income tax on the gap between the two – i.e. their profit.

As an example, currently someone who receives £1,000 a month in rent and has an interest-only mortgage payment of £600 only pays income tax on the remaining £400 that amounts to their monthly rental profit. For a 40 per cent taxpayer this would mean a £160 tax bill, leaving them £240 profit.

Under rules being introduced in April 2017 the tax relief will be reduced up to 2020 when it will be set at a maximum of 20 per cent. At that point the investor in the example above would face a £280 tax bill, leaving them with £120 monthly profit.

With interest rates expected to rise sometime in the next year, buy-to-let landlords with significant debt will see a reduction in tax relief, which will naturally result in higher costs and lower after tax profits.

One alternative, is for landlords to manage the properties through a business.
There are already many benefits to managing a buy-to-let portfolio through a company rather than as an individual, but changes to tax relief mean this route could be more effective for higher rate taxpayers.

Do you need access to the money?
If you are running your property as an individual then any profits after tax will be in your name and easy to access. It is slightly more complicated if you want to draw some money from a business and one option is to take the money out in the form of a dividend. However landlords need to be aware that from next year dividend income will be charged at 7.5 per cent for basic rate taxpayers, 32.5 per cent for those on the higher rate and 38.1 per cent for the additional rate band. This could be alleviated by the tax-free dividend allowance of £5,000 being introduced next year.

Overall, for buy to let investors it is probably best to set up a company if you want to roll up the money and don’t need access to it. You could just use it to build up a pension pot for when you retire.

Are you ready to run a business?
The HMRC has very few requirements for individual landlords. They just have to complete a self-assessment tax return each year that takes account rental income and any expenses and reliefs.

Businesses have a range of responsibilities such as completing annual returns and accounts, all of which could mean paying for an accountant. It could also get more complicated if you start involving shareholders and different directors.There are costs and hassle associated with running a company. This is only really beneficial for serial buy-to-let landlords with a portfolio of at least 10 properties. For those with one or two properties, the associated costs and administration involved with operating a company is unlikely to make it worthwhile.

For personal financial advice contact your accountant.

Tag: tax

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