Effects of EXTRA Taxation for Buy to Let Investors
George Osborne, Chancellor of the Exchequer announced last year two significant changes in taxation laws in relation to stamp duty on the purchase of second properties and tax relief for Buy to Let investors. However, this extra taxation has gone under the radar of most and will come has a shock to most Landlords! Some reports have said that upto 500,000 rental properties will be sold in the next 4 years. What effect will that have?My blog will cover the reality and effects of these changes.
Stamp Duty Change
The Stamp Duty change is simple. If you are buying a buy to let property or a second home, and it completes after 1st April 2016, then you will pay an extra 3% in stamp duty.
For example, if you are buying a buy to let property for £200,000, the stamp duty before 1st April 2016 will be:
0% on the first £125,000 = £0
2% on the next £75,000 = £1500
Total SDLT = £1500
After 1st April, the extra stamp duty will add another £6,000
Total SDLT = £7,500
For a purchase at £275,000
0% on the first £125,000 = £0
2% on the next £125,000 = £2,500
5% on the next £25,000 = £1,250
Total SDLT before 1st April will be £3,750
After the 1st April, the extra stamp duty adds another £8,250
Total SDLT = £12,000
So, the effect thus far is that any buy to let investor currently in the process of buying a property has to complete by 1st April.
The reality is that the market has quietened massively. But, does this leave it open for first time buyers as the government manoeuvres the property market to help them? Or, will smaller 1, 2 and 3 bedroom homes just drop in value until they become affordable again?
What does the loss of tax relief mean?
If you’re new to buy-to-let, you might not appreciate how much effect this will have, especially to those taxpayers at 40 and 45%. Up to now, people buying to let have been able to claim tax relief on their mortgage interest payments at their marginal rate of tax. This means that a basic rate taxpayer would get 20 per cent tax relief, but those at a higher rate would receive 40 per cent relief, while top-rate taxpayers could claim 45 per cent.
Most Landlords are oblivious to the new changes.
Imagine that your buy-to-let property generates a rental income of £10,000 a year with mortgage interest paid of £9,000. In 2020, when the new rules are introduced in full, you will be taxed at 20% of £10,000 (or £2,000). Then 20% of your £9,000 mortgage interest payments (or £1,800) can be deducted, leaving you with a tax bill of £200, the same as before.
But higher and top-rate taxpayers will pay more. Based on the same scenario, in 2020, higher-rate taxpayers will be taxed at 40% of £10,000 (or £4,000), but will only be able to deduct 20% of their £9,000 mortgage interest payments (or £1,800).
This will leave higher-rate taxpayers with a tax bill of £2,200, compared to £400 under the current system. Those paying the 45% tax rate will owe £2,700, compared to £450 today.
Looking at the example where the annual rent received is £15,000 and mortgage interest payments are £10,000 a year, basic-rate taxpayers would still owe £1,000 under the new rules, the same as before. However, higher-rate taxpayers will owe £4,000 from 2020, compared to £2,000 under current rules, and top-rate taxpayers will owe £4,750, rather than £2,250.
BUT, what it means is that a number of Landlords WILL sell their properties as they become a drain on resources, especially if house prices start falling. Perhaps this could balance out the market again. It has been starved of supply for years, increasing prices rapidly. The issues are that demand may also decrease. It is my firm view that the number of first time buyers coming into the market will not be enough to substitute the loss of investors.
We are happy to offer FREE, impartial advice to both First Time Buyers and and Investors concerned about their buy to let properties. Simply, give us a call at Huntingdon Office 01480 447 457, or Cambourne Office 01954 710 700.