Upcoming Changes to UK Property Tax


We are now about a year into the several year-long period in which profound changes will be made to the way landlords are taxed on their properties. Things have already changed quite a bit since the 2015/16 tax year, but with the new tax year approaching and the start of one of the most major changes in recent history nearly upon us, we are perhaps only now getting to the point where reforms really begin in earnest.

Tax Changes so Far

It was the start of the current tax year that saw the first major changes start to come into force. For example, last April saw the introduction of the new stamp duty surcharge on second homes. This saw buyers of any residential property besides their main home, including buy-to-let properties for sale, faced with an additional 3% tax on their purchase. This reform certainly provoked a reaction from investors, resulting in a rush of transactions pushed through before it came into force and a subsequent slump immediately after the change.

Changes to wear and tear allowance were also introduced along with the current tax year last April. Previously, landlords of fully-furnished rentals were able to claim wear and tear allowance at a rate of 10% of net rent received. As of the current financial period, however, this allowance has been abolished and replaced by a new system.

Under new rules, landlords can only claim tax relief on the cost of actually replacing furnishings like-for-like, or with the closest equivalent on the current market. The initial cost of furnishings is not eligible, only the cost of replacement.

Changes Still to Come

Starting in April this year, and continuing up to 2020, will be the phased roll-out of arguably the most significant reform, and almost certainly the most contentious. Once the change has been fully introduced, residential landlords will no longer be able to offset their mortgage interest against their profits for tax purposes, which will have a big impact on property investment in the UK. This will significantly eat into many landlords’ profits, and could eliminate profits on some properties entirely by making the tax bill greater than the profit.

One fact that has been frequently-publicised but often a little misunderstood by investors is the fact that this move is only going to hit landlords who pay the higher rate of tax. The misunderstood part is the fact that this doesn’t mean basic rate taxpayers can necessarily rest easy.

What this group of landlords has to remember is that not being able to deduct mortgage interest means that, in the eyes of the taxman, profits go up. If adding your mortgage interest back onto your profits moves you into a higher tax bracket, this is the calculation HMRC will be using and your will become a higher-rate taxpayer after the changes.

The phased roll-out will allow affected landlords to claim 75% of their finance costs against tax in the 2017/18 tax year, followed by 50% in the 2018/19 year, 25% in 2019/20, and none at all from 6th April 2020.

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