It’s been a tumultuous time for property investors. With so many changes to tenancy legislation and compliance a lot of landlords have overlooked the changes in tax laws that although a bit more complicated to digest may directly affect them.

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3% additional property LBTT tax

Most of us are aware of that the Scottish Government has introduced a 3 per cent levy on the Land and Buildings Transaction Tax (LBTT) for those buying additional properties, including ones to rent but it’s a recent change and one that must be factored in when planning and costing any growth in your portfolio.*

Mortgage Interest Rate Relief

Between 2017 and 2020, the Government will phase in tax relief on mortgage interest being restricted to the basic rate of income tax. Unlike any other business, income tax for some landlords will then be calculated on the landlord’s income (including basic salary) and not their profit possibly pushing landlords into a higher tax bracket. Given that there is no deduction for capital repayments on finance /mortgage costs, this can result in many landlords having a taxable profit but no cash flow from their properties, particularly where they are highly geared. For new purchases, it may therefore be advisable to acquire properties through a limited company structure.*

  • Higher rate and additional rate tax payers will pay more in tax, as tax relief on mortgage interest will be limited to the equivalent level of a basic rate tax payer (currently 20%)
  • With taxable income now being calculated without a deduction for finance costs, some landlords may experience an upward movement in tax bands
  • It could be possible that some landlords currently making a small net profit will experience negative cash flow after tax.

Capital Gains Tax for Residential Property

The 28 per cent rate of capital gains tax is being cut to 20 per cent, but this will exclude residential property, including homes to rent. Effectively a stealth tax hike in comparison with investing in and realising gain in investments other than residential property.*

Removal of Wear and Tear Allowance

The removal of the “wear and tear” allowance has been replaced with only off-setting actual costs incurred on replacing furnishings, appliances and kitchenware in a rented property. This means that residential landlords buying furniture for the first time for a residential property will receive no tax deduction for the first furnishing. Residential landlords are also unable to claim capital allowances on furniture and appliances. However the rental of furniture supplied in a residential property remains fully tax deductible (for both companies and individuals).*

Making Tax Digital

HMRC has embarked on a massive project, Making Tax Digital (MTD), to insist that most businesses, including property businesses, keep their accounting records using computer software with the aim that the software will automatically update HMRC with relevant data on their business income and expenses on a quarterly basis. Based on the current proposals and draft legislation, the requirements are to be phased in so that income tax and National Insurance Contributions (NICs) will be brought within the new regime from April 2018. For landlords with gross rental income below the VAT threshold (£85,000 for 2017/18), the start date will be delayed by 12 months and those with gross rental income below £10,000 will be exempted from the requirements altogether. This income threshold is still subject to further review by HMRC.

Most Affected

  • Existing higher rate tax payers (40% and 45%)
  • Landlords with marginal rental cover (high mortgage costs relative to rental income)
  • Tax payers moving into the higher rate tax band as a result of the changes
  • Landlords with strong rental cover

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Least Affected

  • Lower rate tax payers remaining in the same band
  • Unencumbered landlords

In areas similar to Glasgow where letting agents are able to generate returns and yields of over 8% we continue to see a large number of property investors come in to the market. It may seem like landlords are under siege from the taxman however investing in property is still one of the safest investments we can make, land is finite, population is growing and everyone needs a home to live.

*Please speak to a tax adviser for suitable advice and up to date information on tax rules