Buy to Let Mortgage Tax Relief Changes for Landlords Explained

In recent years, there have been a number of different changes made to the tax relief for landlords and property investors. In this guide, we’ll talk you through some of the changes and how they’ll impact on you and your business.

Mortgage interest tax relief phased out for landlords and investors.

There was a time when landlords were able to claim tax relief on the interest payments of their mortgage. This meant that basic, higher, and additional rate taxpayers would have been able to benefit from relief at 20%,40%, and 45%.

This all changed in the 2015 budget, and the tax relief has been phased out over the last few years.

Landlords are now only able to claim tax credit at the basic rate of 20%, whether they are higher or additional rate taxpayers or not.

Landlords are still able to deduct other allowable costs from their gross rental income when it comes to working out their taxable income. This will include council tax, water rates, insurance, and letting agent’s fees.

Stamp Duty Increase

As of 2016, the stamp duty that is payable on any new buy-to-let property increased to 3% above the standard rate. This increased rate must be paid on the purchase of any additional properties, including second homes and buy-to-lets.

You should also be aware that if you were to move out of your main residence without selling it and then buy another home, then you’ll need to pay the 3% stamp duty surcharge. However, should you sell the original property within three years of completing the purchase, you can get a refund on the stamp duty that you paid.

If you buy a granny annexe, then you will be unlikely to need to pay the additional 3%. You will only need to pay the higher rate of stamp duty if the annexe has its own entrance, can be sold separately to the main property, has its own supply of electricity and water, gets a separate council tax bill, and is worth more than £40,000 on its own.

Wear and Tear Allowance

Many landlords understand that you can deduct certain expenses from your rental income to lower the rate of income tax. In 2016, the Wear and Tear Allowance was replaced by the Replacement of Domestic Items Relief.

Previously, landlords of fully furnished houses could claim a tax deduction of 10%. Under new guidelines, landlords are only able to claim for the actual cost of replacing furniture. The allowance covers furniture that can be moved. Fixed items such as kitchens, baths, and boilers are still classed as an allowable expense, so you won’t be taxed on them if you replace them.

Finance Costs Restriction and Tax Relief

Prior to 2017, you could deduct your finance costs from the rental income you received. The tax office started to phase out the finance costs that you could deduct in 2017 over a four-year period while introducing a new type of relief. From 2020, landlords can no longer deduct any of their mortgage interest from rental income when it comes to calculating taxable profit. Instead of this, landlords will receive 20% tax relief on the interest payments of their mortgages.

The New Rule for Letting Relief

If you are looking to reduce the amount of capital gains tax that you pay when you sell a buy-to-let house, letting relief can help you. You’ll make up to $40,000 in tax-free gains.

In order to qualify for this, you must already qualify for Private Residence Relief. For example, if the property that you are selling used to be your home. You must have let out all or part of the house as residential.

As of 2020, you can only claim for Letting Relief if you are still living in the property when you sell.

Should I set up as a limited company?

If you were to set up as a limited company, in theory, you would be able to continue to declare a rental income once you have deducted the mortgage. If you plan on doing this, you should make sure and do plenty of research first, as even with this tax-saving, you might not be better off.

There are several reasons for this. The main one is that mortgage rates for businesses are more expensive than they are for individuals. This could end up costing you more in higher tax relief.

You will also need to pay additional stamp duty when you transfer ownership of the property to your business.

In addition to this, if you were to incorporate, then you will have more complicated taxes to worry about. Instead of paying income tax on the rent you earn, you will need to file taxes and then pay corporation tax on your profits. To get the rental income, you will need to pay yourself as a dividend.

When do I need to file my tax return?

The changes that we have talked about will all have come into force for the 2020-21 tax year. The deadline for self-assessment is 31st January 2022.

Can I deduct expenses when filing my return?

Many of these changes could raise your tax bill; there are still plenty of costs that you can offset when you are filing your return. These include estate agent fees, insurance, maintenance costs, and service fees.

Can landlords incorporate to keep their mortgage interest relief?

If you were to set up a business that owns their own rental properties, you could continue declaring rental income once you have deducted the mortgage. If you plan on doing this, you should do your research. It is possible that you may end up paying out more than you currently do.

For advice on everything to do with any of the buy- to- let mortgage tax relief changes mentioned in this guide, get in touch today.

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