Posts with tag: mortgage interest tax relief

Think-tank calls for Stamp Duty to be scrapped

Published On: July 25, 2016 at 10:39 am

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A think thank has moved to express its fears towards the stamp duty surcharge for buy-to-let landlords.

The TaxPayers’ Alliance, a British pressure group, believes that tenants could end up bearing the cost of the rises. As such, it is calling on the Government to scrap the stamp-duty surcharge, and reconsider cutting mortgage interest tax relief, to prevent rents spiralling.

Falls

Landlords acquiring buy-to-let property have fallen since the 3% stamp duty surcharge was brought in during the beginning of April. There are further concerns that mortgage interest tax relief cuts, coming into force in April 2017, will drive more investors away from the sector.

This, it is feared, will drive up rents, due to the lower number of properties available on the market.

A number of landlords will be left with little alternative but to pass their extra costs onto tenants, due to their inability to offset their mortgage interest against tax on rental income.

However, the TaxPayers’ Alliance feels that the Government still has an opportunity to undertake more reforms in order to tackle the housing shortage in Britain.

Think-tank calls for Stamp Duty to be scrapped

Think-tank calls for Stamp Duty to be scrapped

Tackling the issue

Jonathan Isaby, chief executive of the TaxPayers’ Alliance said, ‘for decades, politicians have failed to tackle the root cause of the housing crisis: a chronic lack of supply. Stamp duty is still punitively high and gimmicky tweaks to the tax system will ultimately end up penalising tenants and increasing rents,” he added. “The new Chancellor should now seize the opportunity to drastically simplify and reduce property taxes, while removing planning restrictions which prevent huge swathes of land from being built on for no good reason at all.’[1]

The think tank has gained support from the Residential Landlords’ Association. Chairman Alan Ward said, ‘recent tax changes will see many landlords increase rents. This will make it harder for tenants to save for a deposit for a home of their own. It will go against everything the Government claims it wants.’[1]

‘Ahead of the Autumn Statement there is now an opportunity for the new Government to think again about its tax on new housing,’ Ward added.[1]

[1] https://www.landlordtoday.co.uk/breaking-news/2016/7/scrap-stamp-duty-or-watch-tenants-bear-the-brunt-of-buy-to-let-tax-hikes

Landlords told to be aware of tax restrictions

Published On: July 25, 2016 at 9:18 am

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Buy-to-let landlords should pay close attention to tax rules coming into force for residential property in April 2017, or they could face serious consequences.

That is the view of London Chartered Accountants Blick Rothenberg, who have moved to stress the potential costly future facing landlords.

Changes

These tax changes were announced during last year’s Summer Budget, but HMRC only issued guidance on them on Thursday.

The additional 3% stamp duty surcharge has been prominent in the buy-to-let sector, but the restrictions in mortgage interest tax relief could have far-reaching consequences.

Mortgage interest tax relief will limit the amount of interest a residential landlord can deduct to calculate their income tax liability. These restrictions are coming into force in April 2017, being phased in over 4 years until it takes effect in April 2020.

Awareness

Nimesh Shah, partner at Blick Rothenberg, noted, ‘investors in residential property need to be aware of this marked new change and need to start planning for their portfolios now. Whilst the additional 3% SDLT has created the most anxiety amongst buy-to-let investors, the restriction to interest relief may have been overlooked, but this is likely to have greater longer-term effect on after tax returns.’[1]

HMRC say in their latest guidance that ‘all residential landlords with finance costs will be affected, but only some will pay more tax.’  The statement is quite misleading as the changes could have quite far reaching effect, which most buy-to-let landlords will not appreciate,’ he added.[1]

Landlords told to be aware of tax restrictions

Landlords told to be aware of tax restrictions

Rises

Shah went on to note that, ‘A number of individuals have picked up a buy-to-let property in recent years, whether that is an investment property to supplement earnings, a second home which is occasionally rented out or a property which they have inherited and decided to let out.’[1]

‘It is wrong for HMRC to say only some will pay more tax, as entitlement to child benefit, personal allowance and the pension annual allowance will all be affected indirectly through how this new measure operates in practice.  It would also not be an unreasonable assumption to say that the majority of buy-to-let landlords will be higher or additional rate taxpayers and they will be affected without question.  This change will capture a large proportion of the buy-to-let landlord population.’[1]

Impact

When the measures were announced in the Summer Budget, the measure was described as limiting interest relief at the 20% basic rate. However, the actual workings of the restrictions will have a larger impact.

Mr Shah explains, ‘Currently, buy-to-let landlords can deduct all their interest cost to calculate rental profits.  When the new measure takes full effect, the interest cost will be completely disallowed in computing rental profits and instead a tax credit equal to 20% of the interest will be given against the person’s income tax liability. Whilst this may sound like what the Government intended the measure to achieve, the fact the interest is completely disallowed means the individual will have higher overall taxable income.’[1]
‘This could push an individual into a higher rate of income tax (40%/45%), start to reduce their personal allowance (if their income now starts to exceed £100,000), affect their entitlement to child benefit and restrict the amount on which they can claim tax relief for pensions.’[1]

[1] http://www.propertyreporter.co.uk/landlords/landlords-urged-to-pay-attention-to-changes-in-residential-property-tax-rules.html

 

 

Landlords, Consider the Effects of Tax Relief Changes Now

Published On: July 22, 2016 at 11:01 am

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Buy-to-let landlords are being warned to consider the effects of mortgage interest tax relief changes for residential property, which will be introduced in April 2017.

London chartered accountants, Blick Rothenberg LLP believe that some landlords could be in for costly tax consequences if they don’t pay attention to the changes now.

The tax relief changes were announced in last year’s summer Budget, although the Government has only recently released its guidance on the new rules.

The 3% Stamp Duty surcharge for landlords, which was introduced in April this year, has dominated discussion within the sector over recent months. However, the firm insists that the forthcoming tax relief changes are more of a concern for buy-to-let investors.

Landlords, Consider the Effects of Tax Relief Changes Now

Landlords, Consider the Effects of Tax Relief Changes Now

The measure will restrict the amount of interest that a buy-to-let landlord can deduct to calculate their income tax liability. The reduction will be phased in over four years from April 2017, with interest restricted by 25% each year until it takes full effect in April 2020.

A partner at Blick Rothenberg, Nimesh Shah, states: “Investors in residential property need to be aware of this marked new change and need to start planning for their portfolios now.

“Whilst the additional 3% Stamp Duty has created the most anxiety amongst buy-to-let investors, the restriction to interest relief may have been overlooked, but this is likely to have a greater longer-term effect after tax returns.”

The recent guidance from the Government on the changes includes some worked examples to illustrate how landlords will be affected.

Shah comments: “HMRC say in their latest guidance that ‘all residential landlords with finance costs will be affected, but only some will pay more tax’. The statement is quite misleading, as the changes could have quite a far-reaching effect, which most buy-to-let landlords will not appreciate.

“A number of individuals have picked up a buy-to-let property in recent years, whether that is an investment property to supplement earnings, a second home which is occasionally rented out, or a property which they have inherited and decided to let out.

“It is wrong for HMRC to say ‘only some will pay more tax’, as entitlement to child benefit, personal allowance and the pension annual allowance will all be affected indirectly through how this new measure operates in practice. It would also not be an unreasonable assumption to say that the majority of buy-to-let landlords will be higher or additional rate taxpayers and they will be affected without question. This change will capture a large proportion of the buy-to-let landlord population.”

When the change was announced in the summer Budget, it was described as a restriction to interest relief to the 20% basic rate. However, the actual mechanism of how the reduction works has a wider impact.

Shah explains: “Currently, buy-to-let landlords can deduct all their interest cost to calculate rental profits. When the new measure takes full effect, the interest cost will be completely disallowed in computing rental profits, and, instead, a tax credit equal to 20% of the interest will be given against the person’s income tax liability.

“Whilst this may sound like what the Government intended the measure to achieve, the fact the interest is completely disallowed means the individual will have higher overall taxable income.

“This could push an individual into a higher rate of income tax (40/45%), start to reduce their personal allowance (if their income now starts to exceed £100,000), affect their entitlement to child benefit and restrict the amount on which they can claim tax relief for pensions.”

The following two examples highlight some of the issues:

Example 1

Susan is retired and owns a number of residential buy-to-let properties. Her only source of income is the rents from her residential property portfolio, which total £60,000 per annum. She has mortgages on the properties and she pays annual interest of £25,000. Therefore, her net profit before tax is £35,000.

Susan’s income tax position and net profit after tax over the next five years are as follows:

Tax year 2016/17 2017/18 2018/19 2019/20 2020/21
Rental income £60,000 £60,000 £60,000 £60,000 £60,000
Loan interest £25,000 £18,750 £12,500 £6,250 –
Net rental income £35,000 £41,250 £47,500 £53,750 £60,000
Less: personal allowance £11,000 £11,000 £11,000 £11,000 £11,000
Taxable income £24,000 £30,250 £36,500 £42,750 £49,000
Income tax payable £4,800 £6,050 £8,200 £10,700 £13,200
20% tax credit for interest cost – £1,250 £2,500 £3,750 £5,000
Total income tax payable £4,800 £4,800 £5,700 £6,950 £8,200
Net profit after tax £30,200 £30,200 £29,300 £28,050 £26,800

Although Susan could be excused for believing that she is not affected by the change, as her net income after deducting the personal allowance is within the 20% tax rate, the table shows that Susan’s tax bill increases by £3,500 (over 70%) when the restriction takes full effect in April 2020. This is due to the way the restriction operates, which pushes Susan into the 40% rate of income tax. Her overall effective rate of income tax rises by almost 10% because of the changes.

Example 2 

Peter is employed and earns £80,000 in salary and bonuses per annum. As well as his employment income, Peter owns a buy-to-let residential property from which he receives £40,000 a year. Peter has a mortgage on the property and pays £25,000 interest per annum, so that his net rental profit before tax is £15,000.

His income tax position and net profit after tax over the next five years are as follows:

Tax year 2016/17 2017/18 2018/19 2019/20 2020/21
Employment income £80,000 £80,000 £80,000 £80,000 £80,000
Rental income £40,000 £40,000 £40,000 £40,000 £40,000
Loan interest £25,000 £18,750 £12,500 £6,250 –
Total income £95,000 £101,250 £107,500 £113,750 £120,000
Less: personal allowance £11,000 £10,375 £7,250 £4,125 £1,000
Taxable income £84,000 £90,875 £100,250 £109,625 £119,000
Income tax payable £27,200 £29,950 £33,700 £37,450 £41,200
20% tax credit for interest cost – £1,250 £2,500 £3,750 £5,000
Total income tax payable £27,200 £28,700 £31,200 £33,700 £36,200
Net rental profit after tax £9,000 £7,500 £5,000 £2,500 –

The above examples are just two ways that the measures have a wider effect than simply restricting the tax relief on mortgage interest costs.

Buy-to-let landlords must urgently review their portfolios and mortgages, and calculate the exact impact on their businesses after tax returns. Some may decide that buy-to-let is no longer a viable investment option…

The Government’s Guide to Tax Relief Changes for Residential Landlords

Published On: July 20, 2016 at 9:35 am

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Ahead of the phased introduction of tax relief changes for residential landlords in April 2017, the Government has released a guide that explains how the restriction will affect you.

As of April next year, the amount of income tax relief that landlords can claim on residential property finance costs will be cut to the basic rate of tax.

The changes

These changes will affect you if you let out residential properties as an individual, or in a partnership or trust.

The reduction will change how you receive relief for interest and other finance costs, and will be gradually introduced over four years from April 2017.

Under the new rules, finance costs will not be taken into account to work out your taxable property profits. Instead, once the income tax on property profits and any other income sources has been assessed, your income tax liability will be cut to the basic rate. For landlords, this will be the basic rate value of your finance costs.

The Government's Guide to Tax Relief Changes for Residential Landlords

Who will be affected? 

You will be affected by the changes if you are a:

  • UK resident individual that lets residential properties in the UK or overseas
  • Non-UK resident individual that lets residential properties in the UK
  • Individual who lets such properties in partnership
  • Trustee or beneficiary of trusts liable for income tax on property profits

All residential landlords with finance costs will be affected, but only some will pay more tax.

You won’t be affected by the introduction of the reduction if you are a:

  • UK resident company
  • Non-UK resident company
  • Landlord of furnished holiday lets

If you operate as any of the above, you will continue to receive relief for interest and other finance costs as usual.

What does the restriction include?

The finance costs that will be restricted include interest on:

  • Mortgages
  • Loans – including loans to buy furnishings
  • Overdrafts

Other costs affected are:

  • Alternative finance returns
  • Fees and any other incidental costs for getting or repaying mortgages and loans
  • Discounts, premiums and disguised interest

If you take out a loan for both residential and commercial properties, you will need to use a reasonable apportionment of the interest to work out your finance costs for the residential properties, as only the finance costs for the residential property business are restricted. This also applies if your loan was taken out partly for a self-employed trade and partly for residential property.

The introduction 

The changes will be phased in gradually from 6th April 2017 and will be fully in place from 6th April 2020.

As of April next year, you will still be able to deduct some of your finance costs when working out your taxable property profits during the transitional period. These deductions will be gradually withdrawn and replaced with a basic rate tax relief reduction.

You will still be able to use some of your finance costs to work out your property profits and use your remaining finance costs to work out your basic rate tax deduction as follows:

Tax year

 Percentage of finance costs deductible from rental income

Percentage of basic rate tax reduction

2017-18

 75% 25%

2018-19

 50%

50%

2019-20

 25%

75%
2020-21 0%

100%

Other implications of the changes 

These new rules mean that the way taxable income is calculated will change, and that could have other implications for some. For example, if you or your partner receive child benefit and your income is over £50,000, the high income child benefit charge may apply.

These changes were announced in the summer Budget 2015 and are contained in Finance (No. 2) Act 2015, as amended by Finance Bill 2016.

New Chancellor Urged to Suspend Stamp Duty Hike

Published On: July 18, 2016 at 11:06 am

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The ex-President of the National Association of Estate Agents (NAEA) has urged the new Chancellor, Philip Hammond, to suspend the 3% Stamp Duty surcharge for medium-tier landlords, which he believes would help prevent rents from spiralling and exacerbating the housing crisis.

New Chancellor Urged to Suspend Stamp Duty Hike

New Chancellor Urged to Suspend Stamp Duty Hike

With a drop in landlords purchasing buy-to-let properties following the introduction of the 3% Stamp Duty surcharge in April, there is some concern that the supply of rental properties could lead to a sharp rise in rents. Simon Gerrard insists that the only way to curb this increase is to uspend the surcharge for mid-tier landlords – those with five or more properties in their portfolios.

Gerrard, who is also the Managing Director of Martyn Gerrard estate agents, explains: “In the wake of Brexit, the only people actually pulling out of deals are investors. The Chancellor’s Stamp Duty hike on second homes in April had already sent them running for the hills, but Brexit could now be the final nail in the coffin.

“We already have a serious housing shortage, particularly in London, and desperately need to support medium-sized landlords so they can continue providing much-needed accommodation to the so-called generation rent. The only way to keep these individuals in the market and encourage them to keep calm and carry on in the midst of much panic is through removing the tax disincentives.”

He adds: “Brexit, a double-whammy tax from Osborne and a spooked property market – there is only so much an investor will take before they simply put their money elsewhere, which will derail the supply of new rental property to the market and mean an immediate spike in rental prices. Nobody wants to see what that will look like for this country’s housing crisis.”

Last week, the Residential Landlords Association (RLA) also called on the new Chancellor to reconsider the Government’s approach to the private rental sector, and to recognise that forcing some landlords to leave the market and preventing investment through higher Stamp Duty and a reduction in mortgage interest tax relief will only make it more difficult for many people to find suitable homes and will push up rents for private tenants.

The Chairman of the RLA, Alan Ward, comments: “Access to decent, affordable homes to rent is vital to supporting a flexible labour market, and ensuring that young people and families have a place to live.

“Whatever the new Government does to support homeownership, demand will continue to increase for homes to rent.

“The new Chancellor has an important opportunity to reverse recent punitive tax changes and support the majority of landlords who are providing good housing to their tenants to invest in the new homes we need.”

RLA calls for Government to stop tax changes

Published On: July 13, 2016 at 10:40 am

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Rent increases in Britain are unavoidable unless MP’s move to stop what landlords are calling unfair tax changes, according to a new claim.

The Residential Landlords’ Association observes that plans to cut mortgage interest tax relief for buy-to-let landlords will see rents driven up.

Legislation

At present, legislation is moving through Parliament, which the RLA believes will see tax bills rise substantially and in some cases, cut profits altogether. Should supply of rental property continue to fall, landlords could face higher overheads, meaning they will raise rents to cover costs.

In a recent survey of RLA members, some 84% observed that they are more likely to consider raising rents following the Chancellor’s tax alterations.

The firm is now calling for amendments to the Finance Bill, in order to protect both landlords and tenants. It has called for the Government to stop the changes and to remove the additional Stamp Duty levy on buy-to-let purchases. It warns that the tax hike will have a detrimental impact on landlords and the sector when it is needed most.

RLA calls for Government to stop tax changes

RLA calls for Government to stop tax changes

Concerns

A number of MP’s have moved to express their concerns. Former Welsh Secretary, David Jones, has called for the Government to stop heaping more pressure on landlords.

Alan Ward, RLA chairman, stated, ‘landlords do not want to increase rents unnecessarily but many will have to if they stay in business as a result of these wholly unreasonable tax increases. It is unfortunately tenants who will end up paying the price either through higher rent bills of finding it more difficult to find somewhere suitable to live.’[1]

‘We welcome the concern of many MPs and hope that they will be able to persuade the Government to change its mind,’ Ward added.[1]

[1] http://www.propertywire.com/news/europe/uk-landlords-tax-change-2016071312136.html