Buy to let tax changes explained

Buy-to-let tax changes explained

Looking to have the recent buy to let tax changes explained in simple, easy-to-follow language?

You’ve come to the right place. The buy to let tax changes HMRC have made are complex and definitely not in your favour as a landlord.

We’ve crunched the numbers and here’s how you’ll be affected when you purchase, own, or sell a buy-to-let property.

Please note that a different property tax regime applies in Scotland. The Welsh Assembly are also considering launching their own property tax system in 2019. Therefore, readers should be made aware that these notes only apply to England.

Buy to let tax changes explained – buying a home

All primary residence homes (i.e. where you live) bought in England attract Stamp Duty Land Tax (SDLT), a charge the buyer must pay to HMRC based upon the value of the property.

When you purchase a buy to let property or a property which is not your primary residence, you will be subject to additional SDLT.

Let’s look at how the charges compare:

Band Normal Rate Additional Property
£0-£39,999 0% 0%
£40,000-£124,999 0% 3%
£125,000-£249,999 2% 5%
£250,000-£924,999 5% 8%
£925,000-£1,499,999 10% 13%
£1,500,000 and above 12% 15%

At the time of writing, the current average house price in England is £234,794.

If you were buying a home at this price as your primary residence, the first £125,000 would not attract any STLD. The remaining £109,794 would attract STLD at a rate of 2%. Therefore, you would need to pay £2,195.88 to cover your tax.

If this were a buy-to-let property, the first £125,000 would attract STLD at 3% (£3,750). The £109,794 would bring with it a tax of 5% (£5,498.70). Your total STLD bill would come to £9,248.70.

In other words, you’re pay an additional tax premium of £7,052.82.
That’s the first big change in taxation – the next one is the tax you pay on your rent.

Buy to let tax changes explained – the tax on rent has changed completely

Before the change in the law, you were able to claim back both your expenses and your mortgage interest before you calculated the profit you had to pay tax on. This is how it worked for a higher rate tax payer.

Income from renting £10,000
Mortgage interest costs £3,750
Other deductible costs £2,000
Taxable income £4,250
Tax due at 40% £1,700
Profit from BTL £2,550

Now, you can still claim back your expenses but you can only deduct the mortgage interest AFTER working out the level of profit you make. This comes into force in financial year 20/21 so how does that change the calculations?

Income from renting £10,000
Other deductible costs £2,000
Taxable income £8,000
Tax due at 40% £3,200
Mortgage Interest Relief @ 20% of £3,750 £750
Tax due £2,450
Profit from BTL £1,800

Even though your rental income, mortgage interest costs, and expenses have remained the same, your tax (at the 40% band) jumps for £1,700 in 2015/2106 to £2,450 in 2020/2021.

The new system is being phased in between now and FY20/21 and here’s how the calculations change for each year.

40% tax payer Old System New System BTL Tax Bill Net Profit
2017/2018 75% 25% £1,888 £2,363
2018/2019 50% 50% £2,075 £2,175
2019/2020 25% 75% £2,263 £1,988
2020/2021 0% 100% £2,450 £1,800

For basic rate taxpayers, you won’t notice any difference unless what you make from buy-to-let pushes you into the higher 40% rate category.

For higher rate taxpayers whose mortgage interest payments are 75% or more of the rent you get in, all your profit will disappear. For additional rate tax payers, wipeout level is 68%.

Buy to let tax changes explained – what else has changed?

The automatic 10% wear-and-tear allowance has disappeared. You’ll now need to keep a receipt for every item of expenditure on wear-and-tear to claim it back.

Under the old system, you would pay CGT on property you’d sold when you did your self-assessment. Now, you’ve got 30 days to hand the money over to HMRC. The rules regarding limited company disposal of property haven’t changed – settlement is still made nine months and one day after year end through corporation tax.

Buy to let tax changes explained – get help

Keeping your bookkeeping and paperwork in order for your property portfolio is now more important than ever. If you want support from us with these big changes in buy-to-let taxation, please call the Modina team on 020 7183 8241 or email info@modina.co.uk.

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