The tax rules regarding buy-to-let property have long been complex. However, things are about to become even more difficult for individuals who are landlords of residential property.
The 2016/17 tax year brought significant changes including replacing the 10 per cent wear and tear allowance with what is probably a less generous replacement allowance.
On top of this, whilst general capital gains tax (CGT) rates have fallen, the rates applicable to residential property have remained at 18 per cent and 28 per cent. We have also seen the introduction of a 3 per cent Stamp Duty Land Tax surcharge on all purchases of buy to let homes costing above £40,000.
More is yet to come from April 2017 when we see restrictions on the interest relief available to individuals who let residential property. The current legislation allows interest relief at the marginal rate of tax. This relief is soon to be replaced by a tax credit at the basic rate of tax. Landlords may find that although they are making a loss after interest charges they are still left with an income tax charge. The resulting higher level of taxable income may also have a knock-on effect on an individual’s personal allowance, high-income child benefit charge and entitlement to child tax credit.
The new rules will be phased in over a four-year period and between now and then individuals could see a huge increase in their tax bills.
Residential landlords need to consider exactly how these changes will affect them. It may well be that the way in which they structure their property businesses will need to change in order to ensure commerciality in the longer term. Moving properties into corporate ownership may be an option for some.
All the more important then to plan ahead and not sleep-walk into the changes.