Over recent years HMRC have been cracking down on landlords and targeting second home owners in a bid to make the letting of residential property less attractive.
This action includes significant changes to the land tax payable on the purchase of a second property and new rules which are being phased in on the tax deductibility of finance costs for individual landlords of residential property.
The government has introduced higher rates of Stamp Duty Land Tax (SDLT) for buyers of second homes in England, Wales and Northern Ireland and higher rates of Land and Buildings Transaction Tax (LBTT) for second home purchasers in Scotland. The higher rates are three percentage points above the current SDLT/LBTT rates and apply where the consideration given for the property is greater than £40,000. The charge applies to the whole purchase price not just the proportion exceeding £40,000.
This higher rate of tax can result in a significant increase in the cost of a property for the purchaser. An individual purchasing a second property in England with a purchase price of £250,000 will pay SDLT of £10,000 (£7,500 of this relating to the second home supplement). In Scotland a second property with a purchase price of £250,000 would result in an LBTT cost of £9,600 (£7,500 of this relating to the additional residential property supplement).
In addition, beginning from April this year, finance costs relief for individual landlords is being restricted to the basic rate of income tax. The change is being implemented gradually, over a period of four years.
Finance costs include mortgage interest, interest on loans and fees incurred on loans. Landlords will no longer be able to deduct finance costs from their property income in order to arrive at their property profits. A basic rate deduction from their income tax liability will instead be made to them for their finance costs.
For 2017/18, the deduction from property income is restricted to 75% of finance costs, with the remaining 25% available as a basic rate tax reduction. Over the next three years, the direct deduction of finance costs will reduce each year by 25% until 6 April 2020. At this time, all finance costs incurred by a landlord will be given as a basic rate tax deduction.
Although the new rules will mostly affect higher and additional rate taxpayers, basic rate taxpayers could also be affected particularly if they have substantial interest costs.
The new rules could have a significant effect on residential property businesses and it will be important for landlords to take action and review how the changes will impact their business. It will be necessary to consider the most appropriate structure for the rental business going forward.
Advice specific to circumstances should be taken and if you require assistance in connection with this or any other tax matter, please contact Mairi Drummond at Rennie Welch on 01573 224391 or by email at email@example.com.
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