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Tax changes for UK residential property investors

Thursday, 17th March 2016

Categories: Lettings Property Prices Sales

Author: Charlotte Delph

April 2016 sees changes to UK tax rules that will affect UK residential landlords and property investors. These changes follow the changes in Capital Gains Tax rules that came into force for non-resident UK property owners in April last year and will be followed by changes to tax relief on buy-to-let mortgages from April 2017.

Landlords need to fully understand these changes as they will affect the costs of acquisition and of borrowing to invest and therefore need to be taken into account when calculating investment returns (yield).

Stamp Duty Land Tax (SDLT) – payable on the purchase of a property

Current SDLT rates are as follows:

£0-£125,000 = zero
£125,001-£250,000 = 2%
£250,001-£925,000 = 5%
£925,001-£1,500,000 = 10%
£1,500,001 plus = 12%

From April, an additional 3% above the current rates will apply for purchases of additional residential properties, including buy-to-let properties, second homes, and property purchased for children’s dwelling.

Wear and tear allowance offset
The current annual 10% wear and tear offset allowance for furnished properties will be scrapped from April 2016 although the cost of new items can be claimed on a renewals basis as they are purchased.

Buy-to-let mortgage tax relief
The progressive restriction of tax relief on mortgage interest rates is being phased in from April, 2017.

Stage 1 – April 2017
Higher-rate tax relief can still be claimed on the first 75% of mortgage interest costs. The remaining 25% will have the basic rate of tax relief applied.

Stage 2 – April 2018
The amount of tax relief you can claim at the higher rates will reduce to 50% of mortgage interest costs. The remaining 50% will have the basic rate of tax relief applied.

Stage 3 – April 2019
The higher-rate tax relief can only be applied to 25% of mortgage interest costs. The remaining 75% will be at the basic rate.

Stage 4 – April 2020
Tax relief can only be applied at the basic rate level.

Despite the changes to taxation, residential property is likely to continue to be a reliable long term investment providing investors factor the changes into their plans.

All individual investors circumstances are different and we recommend seeking professional advice to ensure that the new rules are understood.

Naturally, the team and myself at Peter Barry will be pleased to assist with any questions you may have.