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How new tax laws affect your ‘Buy to Let’ income

Profitable Property

If you have a have a ‘buy to let’ property or a portfolio of properties then this article will concern you. The appeal of ‘buy to let’ is obvious – a steady income stream, low mortgage costs, and, in the long-run, an increase in value which has steadily been above inflation.

Until recently there have been few specific tax rules in this regard – it was taxed like any other investment. However, there appears to be the political view that the large number of property investors have priced many first-time buyers out of the market.

So, rightly or wrongly, residential property investors are being hit by extra tax in this area. Each of the past 3 Budgets have seen increases in tax payable – Income Tax on net profit, Stamp Duty on purchases and, in the recent March 2016 Budget, Capital Gains Tax on disposals.

Firstly, mortgage interest is being restricted to 20% tax relief only. If you are a higher-rate taxpayer with £10,000 in interest each year, your tax bill will increase by £2,000. Ouch!

Not only that, as your taxable income will be higher, this could affect things like claims to Child Benefit or other tax reliefs which are restricted to basic rate taxpayers. Suddenly, with the same net income as before, you will have moved into a completely different tax bracket.

A family with 3 children will currently receive around £2,500 in Child Benefit per year. If their taxable income is suddenly £10,000 higher as a result of these changes, then possibly all of this Benefit may need to be repaid as well as the extra Income Tax. Double ouch.

As a result of these changes, many people have heard about the idea of running your properties through a limited company. Whilst this does improve some of these issues, it can cause other problems in itself, and potentially make things worse. It is a not topic for easy discussion here, and it will depend on your precise circumstances.

The second change concerns the Stamp Duty on purchasing buy to let properties. This is now 3% more than the rate you would pay on your main residence. The final change is that Capital Gains Tax on the sale of buy to let properties will be 8% higher than the main rates. Triple and Quadruple ouch!

As always, careful planning is required to get the best result. So, please call Des on 0330 024 0498 or email dmm@barringtons.co.uk and we’ll make an appointment for you to discuss this in more detail.

Author: Andrew Wilshaw

Director at Barringtons Chartered Accountants