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Stamp Duty Land Tax: Buy to Let Overview

The Autumn Statement of 2015 saw the announcement of higher rates of Stamp Duty Land Tax to be charged on purchases of additional residential properties (above £40,000), such as buy to let properties and second homes. The effects, which came into force on 01st April 2016 are being felt across the market by more than just landlords with many consumers facing confusion over whether they are liable for additional Stamp Duty rates.

With further tax changes from April 2017, our Stamp Duty Land Tax Overview provides a helpful summary of the tax implications involved in the purchase of an additional property.

Yes. Stamp duty (or Stamp Duty Land Tax (SDLT) to give it its full name) is payable on a buy to let property. The amount varies depending on the price of the property.

The current rates of stamp duty from 1st April 2016 for buy to let properties are;

  • 3% tax on the first £125,000
  • 5% on the portion up to £250,000
  • 8% on the portion up to £925,000
  • 13% on the portion up to £1.5 million
  • 15% on everything over that

Anyone buying a second property that isn’t their main residence will be charged these new rates.

This will include holiday lets and buying a property for children if the parents leave their name on the title deeds. Stamp duty has to be paid within 30 days of completion of the purchase of the property although this is usually paid by the solicitor on completion. The amount of Stamp Duty paid is deductible from any capital gains you might make when the property is sold.

Yes. If you own more than one property at the end of the transaction, you will be subject to additional rate Stamp Duty.

Yes. At the end of the transaction you will own more than one property and will be subject to additional rate Stamp Duty. However, if you sell your previous main home within 36 months, you may receive a refund of the additional Stamp Duty paid.

Yes, if you sell the property for more than you paid for it after deducting costs such as stamp duty and estate agent/solicitors fees. By making a profit, you are essentially ‘gaining capital’, and so the tax applies. However, as an individual you get an annual allowance to set against any gain.

In the 2016/2017 tax year, this allowance is £11,100. This is a special allowance purely for capital items and is separate from the annual personal income tax allowance. If the gain is greater than the £11,100 allowance, you will pay tax at a rate of either 18% or 28% on that profit depending on the amount of income and capital gains you have.

Note that the lower CGT rates of 10% and 20% announced in the March 2016 budget do not apply to landlords and buy to let properties.

There are legitimate ways to reduce the amount of Capital Gains Tax (CGT) payable

  • A loss made on the sale of a buy to let property in previous years
  • Solicitor fees
  • Estate agent fees
  • Costs of advertising the property for sale
  • Stamp duty
  • Any expenditure on ‘capital’ items

These expenses can be deducted from your capital gain. There are also certain tax reliefs available. For example if the property was previously your main residence, the gain may be reduced.

Like income tax, any gain is declared on your Self-Assessment tax return. The tax is therefore payable by the 31st January in the year after the tax year in which the property was sold. (E.g. if a property was sold on 4th May 2015 it is in the tax year to 5th April 2016 so the tax is payable by 31st January 2017.) However, from April 2019, any tax payable on the profit of the sale of the property will be payable within 30 days of the date the property is sold.

Yes. The income you receive as rent is taxable. You need to declare any rent you receive as part of your Self-Assessment tax return. The tax on your income is then charged in accordance with your income tax banding (20% for basic rate taxpayers, 40% for higher rate, and 45% for additional rate).

However, you can minimise the tax you have to pay by deducting certain ‘allowable expenses’ from your taxable rental income.

Allowable expenses include:

  • Interest on buy to let mortgages and other finance charges (but see below)
  • Council tax, insurance, ground rents etc
  • Property repairs and maintenance – however large improvements such as extensions etc will not be income tax deductible. They will be added to the cost of the property when it is sold and be deductible against any capital gain.
  • Legal, management and other professional fees such as letting agency fees.
  • Other property expenses including buildings insurance premiums

The Summer Budget 2015 has reduced the amount of tax relief that is available for interest on buy to let mortgages from April 2017.

Prior to April 2017, tax is payable on your net rental income after deducting allowable expenses including mortgage interest. This meant that landlords paying higher (40%) or additional (45%) rate tax could claim tax relief at their highest rate.

However, from April 2020 tax relief can only be reclaimed at the basic rate (20%), whatever rate of tax the landlord pays. The rules are being phased in over 4 years commencing April 2017.

Worked example of interest deduction new rules

  • House is bought for £300,000
  • 80% mortgage is taken for £240,000
  • Mortgage interest assumed at 4.5% annual mortgage interest is £10,800
  • Rental yield is assumed at 5%, annual rent is £15,000

Basic rate taxpayer

2016-17 2017-18 2018-19 2019-20 2020+
Annual rental income 15,000 15,000 15,000 15,000 15,000
Mortgage interest payable (10,800) (10,800) (10,800) (10,800) (10,800)
Reduction in mortgage interest allowance* 2,700 5,400 8,100 10,800
Total rental income on which tax payable 4,200 6,900 9,600 12,300 15,000
Tax @ 20% 840 1,380 1,920 2,460 3,000
Tax relief at basic rate – 20% of the reduction in mortgage interest allowance (540) (1,080) (1,620) (2,160)
Total tax payable 840 840 840 840 840

A basic rate tax payer on the face of it will not pay any more tax under the new rules, but that’s not the whole story.

The new rules change the way income is calculated. Income is now before deduction of any mortgage interest. In the above example, in 2016-17 (before the new rules), your income was £4,200. In 2020 your income is deemed to be £15,000.

For example, if a person has £35,000 of employment income and rental income of £15,000 and mortgage interest is £10,800.

  • Under the old rules the net profit of £4,200 and £35,000 employment income would all be taxed at the lower rate of 20%.
  • Under the new rules, from 2020, the income from rental of £15,000 and employment income of £35,000 would even after the personal allowance take the taxpayer into the higher rate tax bracket of 40%. (currently income greater then £42,385).

This increase in income could also affect claims for Child Benefit and Income Tax Credits.

*The reduction in mortgage interest allowance is 0% in 2016-17, 25% in 2017-18, 50% in 2018-19, 75% in 2019-20, 100% in 2020 and beyond.

Higher rate taxpayer

The tax impact of the new interest deduction rules will be a significant increase to the tax bill for higher rate taxpayers. In 2020, a higher rate tax payer would pay £2,160 more tax.

2016-17 2017-18 2018-19 2019-20 2020+
Annual rental income 15,000 15,000 15,000 15,000 15,000
Mortgage interest payable (10,800) (10,800) (10,800) (10,800) (10,800)
Reduction in mortgage interest allowance* 2,700 5,400 8,100 10,800
Total rental income on which tax payable 4,200 6,900 9,600 12,300 15,000
Tax @ 40% 1,680 2,760 3,840 4,920 6,000
Tax relief at basic rate – 20% of the reduction in mortgage interest allowance (540) (1,080) (1,620) (2,160)
Total tax payable 1,680 2,200 2,760 3,300 3,840

*The reduction in mortgage interest allowance is 0% in 2016-17, 25% in 2017-18, 50% in 2018-19, 75% in 2019-20, 100% in 2020 and beyond.

There is no simple answer. It depends on a number of factors such as how many properties you hold, whether you need the income quickly and how long you want to hold the properties for and your individual circumstances.

Limited companies are not affected by the new Mortgage interest relief restriction coming in from April 2017. Interest for limited companies is classed as a business expense and fully deductible against income.

Companies pay corporation tax at a fixed rate irrespective of the size of the profits. The Corporation Tax rate is currently at 20% reducing to 17% in 2020. This makes the tax rate very attractive compared to 40% for higher rate tax payers and 45% for additional higher rate taxpayers.

The question is how the money in the company is passed to the individual. If the money is taken out of the company as a dividend, then only the first £5,000 of dividend income is tax free (reducing to £2,000 from April 2018). Any dividends taken out in excess of this will either be charged at 7.5% for a basic rate taxpayer 32.5% for a higher rate taxpayer or 38.1% for an additional higher rate taxpayer. This tax is after the corporation tax at 20% has been paid.

The money could be taken as a salary, however the company would have to operate PAYE and pay Employers National insurance contributions on any salaries paid. This usually in most circumstances works out more expensive than paying dividends.

Companies do also not benefit from the annual allowance of £11,100 against capital gains. So extracting the money for a sold buy to let property could be less tax efficient than holding the property as an individual.

As you have to pay the 20% corporation tax on any gain, no annual allowance is given and you have to pay tax on extracting the money from the company, whereas even a higher rate taxpayer only pays 28% on any gain from the sale of a buy to let as an individual. Companies also have to prepare accounts to be filed with company’s house, prepare and file corporation tax returns which can be more onerous than self-assessment returns.

Interest rates charged on mortgages to companies have historically been higher than to individuals so further investigation of the comparison of the rates charged should be considered alongside the tax implications.

Transferring a current buy to let property into a limited company can trigger stamp duty and capital gains tax charges at the time of transfer so advice should be sought before undertaking such a transaction. Due to the complexities of this area it is essential that you seek proper professional advice.

Yes, Inheritance Tax is payable on buy to let properties but the amount changes depending on our circumstances.

A buy to let property that you own will form part of your estate for Inheritance Tax purposes.

It works like this:

If you’re operating as a sole landlord – with the buy to let mortgage in your name as an individual and your estate entirely owned by you alone – then you’re liable to inheritance tax if your property value less any outstanding mortgage (or combined value of your estate) exceeds £325,000.

If you’re in this with a married or civil partner, then you each have a threshold of £325,000 so the inheritance tax kicks in at £650,000.

Anything above these amounts is taxed at 40%.

Inheritance tax planning is complex and definitely something that should be discussed with an expert tax or financial adviser.

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