There has been much media coverage of the Buy to Let (BTL) market and the continued attacks from a taxation perspective. But will the recent changes affect the thriving market in our local area?
The North, in particular Stockport and Manchester, continue to rank in the top 10 best BTL areas in England. The last BTL index of 2018, published by Lendinvest, ranked Stockport as the second and Manchester as the third best places to invest in buy to let property.
Tax changes affecting buy to let property
Private landlords have come under attack in recent years and significant changes have been made to the way investment property and rental income is taxed. The rise of accidental landlords, those who have relocated or separated from a partner and let out their property, has been a heavy contributing factor.
When you purchase a second property, or the purchase is in a company name then there is an additional 3% charge to stamp duty in both England and Wales.
Mortgage interest relief
Landlords used to be able to deduct all mortgage interest and other allowable costs before calculating their income tax liability. However, in April 2017 mortgage interest tax relief started to be phased out and will disappear completely by 2020/21. Interest relief will be replaced with a credit of 20% of the rental income only against the final liability. These changes could result in many landlords’ income being moved up into the next income tax bracket, lowering their returns substantially.
Capital Gains Tax and lettings relief
Capital Gains Tax (CGT) is nothing new to landlords’ but for those accidental landlords who have resided in the property for a period of time prior to letting, recent charge changes and the removal of lettings relief could have a significant impact on the amount of CGT liability on a sale. If you had lived in the property you are selling at any point, you were able to obtain lettings relief worth up to £40,000 (£80,000 for a couple). However, this relief will no longer be available from April 2020.
In order to minimise tax liability many landlords with an existing portfolio are considering transfers of their existing properties to a company. Some of the tax benefits include:
- Property rental companies will not be affected by the loss of mortgage interest relief.
- Companies pay corporation tax at 19%, reducing to 17%, in 2020 on the disposal of residential property as opposed to capital gains tax which will be either 18% or 28%.
It may be possible to obtain CGT and stamp duty relief on the incorporation provided that the property rentals are being operated as a business.
Consideration should also be given, as to whether new properties should be bought using a company in order to obtain the above benefits. It may also be possible to structure such companies as family investment companies.
Energy Performance Certificates – are you up to speed?
An EPC (Energy Performance Certificate) gives a property a rating for its energy efficiency – a score of A being the most energy efficient and score of G being the least. Every property that is tenanted must have an EPC. For new tenancies (or tenancy renewals) entered into after 1st April 2018, the property must have an EPC rating of E or higher. If the property has an F or G rating, the landlord must not let it out to tenants until energy efficiency improvements have been made to the rating. For continuing tenancies (those which were already in place on 1st April 2018) with an EPC rating lower than an E, the landlord has until 1st April 2020 to make the energy efficiency improvements. Letting a property which does not meet the minimum energy efficiency requirements can result in a significant financial penalty for the Landlord.
What to do next?
You should speak to a solicitor who specialises in property who can then assist with any of the recent taxation changes. Alternatively, if you’re looking to climb the Buy to Let ladder, they will also be able to provide legal advice about how best to get started.