Having set out the changes to capital gains tax affecting residential property in the last issue of the London Property Gazette, we now turn to the other changes landlords need to be aware of. Cynics might say they seem to be part of a plan to discourage investment into residential property in the UK.
In this time of economic uncertainty, landlords do not need the additional worry of changes to the tax system to make their investments less attractive.
There have been three main changes affecting landlords:
-A restriction on tax relief on mortgage interest for individual investors,
-The withdrawal of the wear and tear allowance in respect of furniture
-The additional rate of Stamp Duty Land Tax (SDLT).
By 2020 individual investors will no longer receive full tax relief on mortgage interest. It is being gradually reduced to 20% over the next three years and the way it will be dealt with could have other costly implications relating to the annual personal allowance and the claw back of Child Benefit.
There are no proposals planned to limit the relief for companies, so many landlords are looking at the financial feasibility of incorporating their property businesses. There are implications, as trying to save one tax another could trigger another!
Historically, rather than claiming the cost of renewing furniture, landlords of furnished accommodation could claim an allowance equal to 10% of the rent (after deducting certain expenses). Not only did this reduce record keeping, but it was available in years when there was no actual expenditure. This allowance was abolished with effect from 6th April 2016. From that date landlords can only claim for actual expenditure renewing furniture, white goods etc. This isnt all bad news as more properties can fall within the expanded definition of 'furnished.'
The final change was the introduction of a 3% SDLT surcharge on second properties for individual investors. This can come as a nasty surprise – for example on a property costing £450,000, which in London would not seem too excessive, the additional charge would be £13,500 and this is on top of the standard charge of £12,500.
With the announcement that the base rate will remain at 0.5% landlords hoping for cheaper interest rates will to wait until the MPC meet again to find out if a reduction is on the cards.