New tax rules: what landlords can and can't claim

Karen SadlerTax expertGarbutt and Elliott,

A new buy-to-let tax regime is underway
A new buy-to-let tax regime is underway

From an outsider’s perspective the buy-to-let market can seem like a win-win situation with a rental income stream, a valuable mortgage free asset available in the future and an ability to benefit from an upturn in the housing market. But there are tax implications along with recent changes to the rules that the first time buy-to-let investor should be aware of.

From the outset there is a considerable tax expense involved in the purchase of your buy to let property through Stamp Duty Land Tax. For residential properties, SDLT can be between two and 12 per cent on the value of your property exceeding £125,000. More recently the government introduced an additional three per cent SDLT payable if buying this property means that you will own more than one residential property. For example, if you were purchasing a second property for £250,000 the SDLT payable would be five per cent on the value above £125,000, costing £6,250.

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Once let out, you then have to account for the rental income you receive which will incur Income Tax. The first £1,000 is your tax free “property allowance”. Where your property income after allowable expenses exceeds £2,500 you will have to declare and pay this income by Self Assessment. If you do not usually send a tax return you will need to notify HMRC of this additional income by the 5th October following the year in which the rental income stream commences.

As an investor you will only minimise your Income Tax bill if you have a clear understanding of the allowable expenses HMRC permit you to deduct from your property rental income. These include: Interest on property loans/mortgages; letting agent and accountancy fees; building and content insurance; maintenance and repairs to the property (not improvements); utility bills and council tax; service costs, such as cleaning or gardening, and any other direct costs such as advertising.

There are two key areas of expenditure which have been subject to changes: In 2017/18, the government introduced a phased restriction of mortgage interest relief between 2017 and 2020 for higher rate taxpayers. For 2018/19 higher rate taxpayers will only be able to offset 50 per cent of their mortgage interest against property rental income, to be replaced by a 20 per cent tax credit on the remaining 50 per cent of interest paid. This is to be reduced to 25 per cent for 2019/20 (with the balance of 75 per cent given as a 20 per cent tax credit) and to zero in 2020/21. From 2020/21 relief for interest costs will be given as a 20 per cent tax credit. Whilst this change mainly affects higher rate taxpayers, those with taxable income over £34,500 in 18/19, it is also likely to push some basic rate taxpayers into the higher rate tax bracket once we include property income.

This change only applies to private landlords and will significantly reduce the tax relief available for higher rate taxpayers on their mortgage interest costs: who will effectively receive relief for interest costs at 20 per cent rather than at their 40 per cent higher tax rate.

Secondly, for residential property you are now able to claim an allowable deduction for the replacement of domestic household items such as beds, wardrobes, furnishing such as carpets, household appliances and kitchenware provided for use by the tenants. Getting the correct tax advice will help to ensure that you can minimise your tax liability.