Menu
  • Mortgages
  • Protection
  • Wills & Trusts

What impact will the 2015 tax changes for landlords have on your portfolio?

09th February 2016

ShareFacebook0Twitter0LinkedIn13Google+0Email

The changes that we have seen directed at Landlords have been much talked about, but what will it actually mean?

To help us understand, we have a great guest blog from Bill Humphreys, who is a Director at Libra Wealth Management – over to Bill…

During 2015 the Chancellor announced four separate measures that will significantly increase the tax burden for many landlords. The key changes are summarised below:

  1. Landlords of furnished lets can currently claim a wear and tear allowance of 10% of their rental income. With effect from April 2016 this relief will be restricted to expenditure actually incurred.
  2. Mortgage interest costs can currently be deducted against rental profits which effectively gives the landlord tax relief at their highest marginal rate of tax. From April 2017 this relief will be reduced over 4 years to the basic rate of income tax (which is currently 20%).
  3. From April 2016 SDLT will increase by 3% for landlords (and second home buyers)
  4. From 2019 Capital Gains Tax arising on the sale of a property (other than the main residence) will have to be paid within 30 days of completion. At the present time the Capital Gains Tax is paid between (approximately) 10 and 22 months after completion.

It is probably worth highlighting the impact that this may have using an example.

Example – The landlord purchased a buy to let property for £500,000 and the property generates annual rental income of £22,500 and is fully furnished. The purchase was financed by an interest only mortgage of £375,000 at 4%. The landlord incurs other expenses (agency fees etc) of £3,375 per annum. The landlord is a 45% taxpayer.

 Now

 2020/21

Rent

 22,500

 22,500

Mortgage interest

 15,000

Other expenses

 3,375

 3,375

Wear and tear allowance

 2,250

Total expenses

 20,625

 3,375

Net rental profit

 1,875

 19,125

Tax at 45%

 844

 8,606

Mortgage interest relief at 20%

 3,000

Net tax payable

 844

 5,606

 

Under the current regime the landlord would have income tax of approximately £844 to pay annually whereas under the proposed new rules the annual income tax payable would be £5,606! Not only is this a staggering increase in the tax liability but it actually is greater than the rental profit and would leave the landlord with negative cash flow.

Based on the current rules the SDLT would be £15,000. Under the proposed new rules the SDLT would increase to £30,000.

As you can see these changes are likely to have a significant adverse impact on the tax position of many landlords. In certain circumstances the impact will be even more severe.  Where the landlords current total income is close to important income thresholds it is possible that they will also lose their rights to other benefits, reliefs or allowances.  A few examples are set out below:

  • if the landlord in the previous example had other income of £41,000 the impact of the changes would push their income above the upper limit to receive child benefit so they would pay income tax equivalent to the entire benefit.
  • if the landlord in the previous example had other income of £98,000 the impact of the changes could also result in the landlord losing most of their personal allowance.
  • For additional rate taxpayers the changes may also impact on the amount that landlords can contribute to personal pension plans.

…………….and what should you do about it?

There are a number of potential mitigation strategies depending upon your circumstances. We would recommend that you obtain independent tax advice as soon as possible to establish how these changes will impact you and your portfolio and explore alternative strategies.

With this in mind we have developed a relationship with a firm of Chartered Accountants who will be able to help you understand the impact of these proposed new rules on your personal situation and assist you in considering alternative strategies.

 

If you want more information you can contact Bill Humphreys at Libra Wealth Management Limited as below :-

Libra Wealth Management Limited, Suite 31, 10 Churchill Square, West Malling, Kent, ME19 4YU

E mail bill@lwmltd.com

Telephone 01732 897900

Web site www.lwmltd.com

 

Bow Terrier

Mortgage Guides

This is Bow, he’s a plucky little Boston Terrier and knows a thing about mortgage applications. His owner, Patrick, is one of our clients and Bow here helps with his paperwork. If there’s anything you need to know about mortgage applications or the paperwork entailed then check out our advice hub – it has everything you need!

View the mortgage guides

Andrew Montlake

About Monty

Andrew Montlake, Director and Spokesperson for Coreco, gives his honest and forthright views on the mortgage market, economy and all things property related. Monty was voted "Mortgage Personality of the year 2008", "Best Press Spokesperson" in 2011 and is the current holder of the British Mortgage Awards “Best Marketeer” title. Expect expert analysis, delivered in a down to earth style with a side helping of exuberance.