How to be a property investor: Taxes for buy-to-let investors
In the sixth article in our How to be a property investor series we explain the heavier tax burden that existing and prospective landlords need to consider.
The past year has seen the Government bow to pressure to reform the tax regime for landlords.
Groups campaigning for affordable housing had repeatedly complained that landlords benefit from a range of tax advantages compared to potential owner-occupiers.
The first tax change came in the Summer Budget last year when Chancellor George Osborne announced the Government will slash the amount of tax relief on mortgage payments landlords can claim to the basic rate of 20%.
Currently landlords can claim tax relief on their mortgage interest payments at their marginal rate of tax, so either 20%, 40% or 45%.
The changes will be phased in from April 2017. Landlords who pay basic rate tax won’t see a change, but those on higher incomes will find themselves losing out.
How much could landlords lose?
Nationwide Building Society gives the example of a landlord who is a 40% taxpayer with a £150,000 buy-to-let mortgage on a property worth £200,000, with a monthly rent of £800. He currently has a net profit of about £2,160 a year. But under the new system that net profit will fall to £960 by 2020.
Mr Osborne’s next move came in November 2015 and aimed to deter landlords from investing in additional properties. The Autumn Statement included the surprise announcement that landlords and second home owners in England and Wales would pay a 3% surcharge on existing stamp duty land tax (SDLT) rates from April 2016.
The stamp duty changes saw a rush of buy-to-let purchases completed in March 2016 before the new rates took effect on 1 April.
Christian Faes, co-founder & CEO of LendInvest, says: ”The stamp duty hike spells bad news for landlords – and their tenants. Put simply: when taxes rise, someone has to pay. Our latest BTL Index shows that the likely payer is ultimately going to be the tenant, with higher rents. The stamp duty land tax hike will cause rental yields to fall for landlords, putting pressure on them to raise the rents they charge.”
Mr Faes’ view is backed up by the Residential Landlords Association (RLA) which warned the tax hikes will worsen the rented accommodation shortage and push up rents.
Research by LendInvest has found that landlords in London and the south east will be hit the hardest by the stamp duty changes, while investors in Sunderland, Blackburn, Durham, Hull and Wigan, where property prices are typically less than £125,000, will find themselves paying stamp duty for the first time.
How to lighten the tax burden
The stamp duty hikes doesn’t affect landlords buying property through limited companies – the way both institutional investors and portfolio landlords buy property. Kent Reliance, a mortgage lender, claims the move will mean more landlords buying property through companies in the future.
Those landlords looking to either incorporate their buy-to-let business, or exit the market altogether, should seek professional advice before making a decision.
Those selling up should bear in mind that they might have a capital gains tax (CGT) liability on the sale of any property that’s not their principal residence.
Currently, sellers work out the CGT after the end of the tax year as part of their tax return. However, from 2019 CGT from the sale of property will be payable to HMRC within 30 days of the sale.
Sellers will also have to pay estate agent and legal fees to sell their property.
Stamp duty rates from gov.uk
|Band||Existing residential SDLT rates||New additional property SDLT rates for landlords|
|£0* - £125k||0%||3%|
|£125k - £250k||2%||5%|
|£250k - £925k||5%||8%|
|£925k - £1.5m||10%||13%|
Don't miss the first articles in this series:
- Our national love affair with property
- A history of property prices
- Property versus pensions
- Buy to let: Buying a property
- Buy to let: Letting it out
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.