Buy-to-let landlords are facing real upheaval with big changes on the way from next month. The new measures announced by the Government will affect how much you pay to buy property and from next year how much tax you will have to pay. It's important that you understand the changes, so that you are clear when making any decisions on either becoming a first-time landlord or when deciding whether to invest in further property to expand your portfolio.
What's happening with Stamp Duty?
The Chancellor announced in the Autumn Statement last year that anyone buying another property will pay an additional 3% stamp duty on top of the standard rates. That will affect most buy-to-let purchases although, if it is a first time purchase and you do not own any other properties, the higher rate will not apply.
Is it definitely happening and when?
The change is due to take effect from April 1st so any relevant purchases completing after the end of March will be subject to the higher rates. Even though the start date is so close, watch out for fine-tuning on Budget Day on March 16, when the final rules are due to be announced.
Has the announcement had an impact already?
The new rules will see stamp duty increase from £2,500 to £10,000 on an additional property purchase at £250,000. This has led to an increase in activity in the early part of the year as some have rushed to buy property and avoid the surcharge. As the deadline approaches it is now too late for anyone to expect to avoid the surcharge, as there is simply not enough time left to complete the typical buying process.
It's not just Stamp Duty - what's happening to finance cost tax relief?
Another blow to buy-to-let landlords is the tax relief changes which start in April 2017. Currently and until then, landlords can offset the mortgage interest they pay against their rental income to reduce their tax bill. When the new rules hit, relief will eventually be limited to the basic rate of tax of 20% instead of 40% or 45% for higher and additional-rate tax payers.
How will that affect landlords?
The changes are being introduced in stages and will not come into full effect until April 2020. Between now and then the restriction on finance cost relief will tighten each year until only basic rate relief is available. That will certainly see an increase in the tax bill for higher and additional rate tax payers. Due to the changes to how tax will be calculated, some basic rate taxpayers may also find themselves being affected as more are pulled into a higher tax bracket.
Is it possible to avoid the changes to tax relief?
It is expected that some landlords, if they have not already, will set up a limited company to purchase buy-to-let properties because a company can still claim relief on mortgage interest. This could be worth considering particularly for higher-rate taxpayers who intend to own several properties. However, there can be tax implications to transfer existing property including Capital Gains Tax and Stamp Duty Land Tax, so tax advice should be sought.
Can I use a standard Buy-to-Let mortgage?
If you are buying through a company you will need to get the right mortgage. Most lenders don't currently offer deals for limited company purchases so you'll need to find the right lender. The downside is that rates are generally higher than standard buy-to-let. Although it's a niche market at the moment, if the trend continues more lenders could start offering them. On the upside, mortgages for buy to let are currently extremely low and new lenders are entering the market, which should only increase the competition even further.
We've teamed up with L & C Mortgages to offer you fee free mortgage advice, head to their websiteor telephone (0800 923 2045) one of their expert mortgage advisers today to look into your mortgage options.
NB: YOUR HOME OR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGEMost buy-to-let mortgages are not regulated by the FCA