Recent mortgage interest relief and tax changes for buy to let properties have hit landlords’ profits hard and many are questioning whether it’s worth keeping their property portfolio or moving away from the letting game.
There are still some advantages to being a landlord. The rental income, although not what it used to be, can reach yields of 8% in some places. As property values increase, your money grows as you generate capital growth.
The disadvantages of buy to let properties are the costs of maintaining the let alongside the additional tax consequences are that you will pay more tax. Your capital falls when property prices fall and if you sell for less than you bought, you must make up the shortfall on an interest only mortgage. Landlords have legal requirements to make properties safe and comfortable.
With spiralling costs and tax changes in the residential rental market, many buy to let landlords are looking to sell up and exit, creating a reduction in properties available to rent.
Mortgage interest relief
This has been reduced gradually since 2017. Previously landlords could deduct the interest they pay on their mortgage before paying tax, giving higher rate taxpayers 40% relief on their mortgage payments. Landlords are now given a tax credit based on 20% of their mortgage interest instead which affects higher rate taxpayers in particular.
As landlords now have to declare the income used to pay their mortgage (rather than declaring rental income after deducting mortgage interest repayments), this could push people from the basic rate to the higher rate, meaning a rise in their tax bill.
Interest rate rises
Increased interest rates means that the cost of borrowing has risen enormously in the past 12 months. A large rent increase to cover the rise in landlord costs is sometimes just not possible as tenants are already coping with larger energy bills and the cost of living crisis so landlords are having to absorb these increases.
Income tax
Landlords that own residential property personally or with co-investors, have no deduction for finance costs against rental income since 2021. Landlords now receive a credit against their income tax liability, equivalent to the basic rate of tax. This is applied to the lower of the interest costs incurred or the level of rental profit before interest.
Capital gains tax (CGT)
CGT at 18% (or 28% for higher rate taxpayers) is applied when a property is sold at a gain and residential property is subject to a higher rate of CGT than non-residential property or other assets.
The capital gains exemption will fall from £12,300 in 2022-23, to £6,000 in 2023-24 and £3000 from 6 April 2024. Landlords must report the disposal of a property to HMRC within 60 days of the completion date and the tax due must also be paid in the same timeframe.
Stamp duty land tax (SDLT)
When buying a residential property, landlords must pay a SDLT surcharge unless they own no other property. In England and Northern Ireland, second properties are subject to a 3% surcharge over and above the normal SDLT liability (slightly different rates apply in Scotland and Wales). If the landlord is not a UK tax resident, there is also a further 2% surcharge.
Company ownership of property
If a landlord decides to own investment properties through a company rather than personally, corporation tax of 19% for profits up to £50,000 applies to rental profits. From April 2023, corporation tax on profits over £50,000 will increase to £25%. Finance costs are usually an allowable expense against rental income for corporation tax purposes (unlike the income tax treatment). However, when money or assets are removed from the company, income tax or CGT are charged.
As the old saying goes, the only certainties in life are death and taxes. With residential buy to let property, the tax gets you any which way. Landlords are certainly being squeezed financially from all angles. CRM can offer sage advice and exceptional guidance on the tax implications of property ownership. Give the friendly, approachable team a call on 01865 379272.
