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Buy-to-let taxation

This article is part of
Guide to buy-to-let and taxation

Buy-to-let taxation

When you start renting out a property, you must tell HM Revenue & Customs.

If being a landlord is a client’s main source of income, or if someone rents out more than one property, or investors are buying new properties to rent out, then the client must also pay class two national insurance.

But in addition to this, during 2015, the government unveiled a series of measures that put significant pressure on landlords.

The first thing the chancellor did, in his Summer Budget last year, was to make a change to the way in which landlords can claim ‘wear and tear’, by replacing the allowance with a charge on a cost-incurred basis.

Until 6 April this year, landlords can claim 10 per cent of the net rent as ‘wear and tear’ allowance for furniture and equipment provided with a furnished residential letting.

Net rent, according to the government website, is “the rent received, less any costs you pay that a tenant would usually pay, such as council tax”.

But this allowance is being replaced with a relief that will mean landlords of residential dwelling houses can only deduct the costs they incur on replacing furnishings in the property.

Also in the Summer Budget, the chancellor announced buy-to-let landlords are due to receive a lower rate of tax relief on mortgage payments - a flat rate of 20 per cent tax credit - under changes to the taxation of mortgage interest.

Landlords will no longer be able to deduct the cost of their mortgage interest from their rental income, so tax will be applied to the rent received, rather than net rent - that which is left of the rent after the mortgage interest has been paid.

This could transform properties that currently generate positive cash flow into a loss-making investment (on an income basis) because of the extra tax.

This could leave some landlords receiving no profit at all, as it will be eroded by the tax payments and mortgage interest.

These changes are being gradually phased in between now and 2020.

Scottish Question

The situation is not much better for people north of the border, as earlier this year, the Scottish Parliament Finance Committee proposed a 3 per cent Land and Buildings Transaction Tax (LBTT) supplement on purchases of second properties.

According to a submission to the SPFC from the Council of Mortgage Lenders: “Imposing an extra 3 per cent LBTT on purchases at or above £40,000 will make property purchases up to £145,000, which are currently exempt, subject to this tax for the first time.”

Then in November 2015, during the Autumn Statement, chancellor George Osborne announced a 3 per cent stamp duty hike on buy-to-let properties, with effect from 1 April 2016.

According to Steve Griffiths, head of sales and distribution for Kensington Group, the numbers speak for themselves: “Had the 3 per cent surcharge been in place for the first quarter of 2016, an additional £830m would have been charged to UK landlords.