Landlord tax rules have seen some significant changes over the last few years. From stamp duty to capital gains tax, there are a number of different rules and reliefs that apply at every stage of the property life cycle.
Stamp duty on second properties
From April 2016, stamp duty land tax (SDLT) on second properties, including rental properties, was increased to include an additional 3% surcharge over and above standard rates.
Anyone purchasing a rental property now pays 3% SDLT for the first £125,000; 5% instead of 2% on the portion between £125,001 and £250,000, and 8% on any amount above £250,001 – increasing the amount of up-front cash landlords need to buy a new property.
Tax on rental income
Until recently, landlords could deduct all finance costs from their rental income and profits were taxed at their marginal rate. However, starting from April 2017 and phased in over a four-year period, tax relief for finance costs is being restricted to a basic rate tax credit.
How these rules will impact you as a landlord will depend on your individual circumstances. However, there are a range of strategies to mitigate the affects of these changes, from resizing your portfolio to moving properties into a limited company – this is where seeking professional advice can be so invaluable.
Wear and tear allowance
Landlords with furnished properties can take advantage of a ‘wear and tear’ allowance to reflect the fact that furnishings need to be replaced regularly. Until recently, the allowance was set at 10% of gross rent but, following a change to the rules, landlords can only deduct the cost of new items against their rental income now.
Insurance premium tax
Landlords can expect to pay 12% insurance premium tax on any insurance they arrange associated with their rental property. While there is no legal requirement for landlords to take out insurance, mortgage lenders usually require specialist building insurance to cover the costs of rebuilding or repairing the structure of the rental property if it is damaged or destroyed by events like fire, storm, flood or vandalism.
Capital gains tax
Landlords are subject to capital gains tax on property sales. The size of the gain is usually the difference between the amount paid for the property and the amount achieved when the property is sold. Landlords can deduct costs associated with buying, selling and improving their property to reduce the gain so it’s important to keep receipts for all these items.
This article is only a brief overview of some taxes that may be applicable to landlords and should not be considered as an exact guide. Before investing in property or looking to restructure an existing portfolio, individuals should always seek expert advice from a qualified tax specialist. If you’re a landlord and would like to discuss your buying options, contact us today.