Landlord tax rules have seen some significant changes over the last few years. From stamp duty to capital gains tax, there are rules and reliefs that apply at every stage of the property life cycle. It’s important for landlords to keep on top of tax issues, so here’s a look at some of the key aspects of landlord tax to make sure you stay at the top of your game.

1. Stamp duty on second properties

From April 2016, stamp duty land tax (SDLT) on second properties, including rental properties, was increased to include an additional 3% surcharge over and above standard rates.

This means anyone purchasing a rental property now pays 3% SDLT for the first £125,000; 5% instead of 2% on the portion between £125,001 and £250,000, and 8% on any amount above £250,001.

The change to SDLT increases the amount of up-front cash landlords need to buy a new property. As a result, implementation has been followed by a significant drop in new property purchases. According to UK Finance, the average number of buy-to-let mortgages taken out for house purchase each month in 2014 was 8,300. In 2017, this fell to 3,800.

2. Tax on rental income

Until recently, landlords could deduct all finance costs from their rental income and profits were taxed at their marginal rate.

However, starting from April 2017 and phased in over a four-year period, tax relief for finance costs is being restricted to a basic rate tax credit.

This table shows how the transition will progress:

Exactly how the new rules impact landlord finances will depend very much on each landlord’s individual circumstances and portfolio. For basic rate taxpayers with small portfolios, the impact is likely to be limited. However, those with bigger incomes and larger portfolios are likely to see a significant change and some taxpayers will also move to a higher rate tax band.

Landlords are adopting a range of different strategies to mitigate the impact of these changes, ranging from rent increases to portfolio resizing. Moving properties into a limited company is one strategy often mooted but, while this may work for some, it will not be advantageous for all and landlords should take professional advice if considering this option.

3. Wear and tear allowance

Landlords with furnished properties can take advantage of a ‘wear and tear’ allowance to reflect the fact that furnishings need to be replaced regularly.

Until recently, the allowance was set at 10% of gross rent but, following a change to the rules, landlords can only deduct the cost of new items against their rental income now.

There is no deduction available for the initial furnishings and, to take advantage of this allowance, landlords will need to show evidence of the actual cost of replacing furnishings and make the claim in the year that the replacement was made.

4. Insurance premium tax

Landlords can expect to pay 12% insurance premium tax on any insurance they arrange associated with their rental property.

While there is no legal requirement for landlords to take out insurance, mortgage lenders usually require specialist building insurance to cover the costs of rebuilding or repairing the structure of the rental property if it is damaged or destroyed by events like fire, storm, flood or vandalism. Landlords may also decide to take additional insurance to cover, for example, damage to their furnishings and appliances, tenant default or home emergencies.

Insurance premium tax has been on the rise for almost all categories of insurance rising from 6% prior to November 2015 to 12% today.

5. Capital gains tax

Landlords are subject to capital gains tax (CGT) on property sales.

The size of the gain is usually the difference between the amount paid for the property and the amount achieved when the property is sold. Landlords can deduct costs associated with buying, selling and improving their property to reduce the gain so it’s important to keep receipts for all these items.

Basic rate taxpayers pay 18% on gains they make when selling property, while higher and additional rate taxpayers pay 28%. With other assets, the basic rate of CGT is 10% and the higher rate is 20%.

Landlords also need to be aware of a couple of planned changes to CGT around payment dates and relief.

Currently, CGT on property sales is payable on 31 January - after the end of the tax year in which the sale completes. However, for property sales made after 6 April 2020, it’s expected that payment will need to be made much quicker - 30 days after the sale completes. In addition, from this date, reliefs currently available if a property has previously been a principal private residence will reduce.

When residential properties are held in a company or other ‘wrapper’, additional regulations may also apply, including the Annual Tax on Enveloped Dwellings.

The information in this blog is intended for general information purposes only and should not be used as a substitute for professional advice. Landlords and investors should seek independent advice from a qualified tax adviser and discuss options available for their individual portfolios.

14 January 2019