Tax issues for buy-to-let properties

Posted by James Richards on March 17 2016 in Conveyancing, Real estate, Real estate occupiers

Reduction in buy-to-let mortgage interest relief

Currently, buy to let landlords can claim tax relief and offset the whole amount of mortgage interest at their personal rate of tax. For higher rate tax payers, this means 40% and for top-rate taxpayers, 45%. Between April 2017 and April 2020, the amount of relief will be reduced on a phased basis to the basic rate so that by April 2020, a flat rate of 20% will apply. Accordingly, the higher the rate of interest and tax that is currently paid by a landlord, the higher the impact of these changes on them.

The potential effect of this change on the housing market is to reduce competition for buyers from buy-to-let investors and to create a more ‘level the playing field’. It has been suggested however, that one unforeseen consequence is that a new generation of ‘silver landlords’ might be created, using their pension pots to buy rental property.

Ways to mitigate

  • Portfolio restructuring: the changes will not have any impact on landlords who do not pay any mortgage interest.

  • Remortgage: switch to a mortgage with a lower rate of interest.

  • Spouses: if the landlord is a higher or additional rate tax payer and has a spouse or civil partner who doesn't work, transfer some of the properties to the spouse to utilise their tax free personal allowance,

SDLT on Additional Properties

It was announced in the 2015 Autumn Statement and Spending Review that from 1 April 2016, higher rates of SDLT will apply to the purchase of additional residential properties  purchased other than as a main residence (such as buy-to-let properties) for chargeable consideration exceeding £40,000. The higher rate amounts to an additional 3% SDLT, as shown below:

Band

Existing residential SDLT rates

New additional property SDLT rates

£0* - £125k

0%

3%

£125k - £250k

2%

5%

£250k - £925k

5%

8%

£925k - £1.5m

10%

13%

£1.5m +

12%

15%

*Transactions under £40,000 do not attract the higher rate.

The higher rate will not apply to the purchase of a residential property, regardless of whether the properties acquired as a home was a buy-to-let, provided that the purchaser does not own any other property, either in his own name or jointly and is not beneficially entitled to residential property under a trust.

The most common scenario in which purchasers will pay the higher rates is where they are purchasing a buy-to-let or second home in addition to their main home.

Main Residence

The higher rates will not apply if the individual owns only one residential property, irrespective of the intended use of the property. If the individual purchaser owns two or more residential properties, whether or not the higher rates will apply will depend on whether they are replacing their main residence:-

  • Where an individual is replacing a main residence the higher rates of SDLT will not apply.
  • If the purchaser is not replacing a main residence (either because they have not sold a previous main residence within the last 18 months or the property being acquired is not a new main residence), the higher rate will apply.
  • Unlike CGT rules, the SDLT rules will not permit a person or couple to elect which of two or more properties is to be treated as their main residence. The matter will be decided on the facts. HMRC will consider factors including:
     - Where the individual and the family spends their time;
     - If the individual has children, where they go to school; and
     - At which residence the individuals registered to vote.

Refund claim: The government recognises that there could be a period of time in between purchase by an individual of their main residence and the sale of the former main residence. Therefore in the case of a purchase that precedes the sale of the old home, SDLT will be payable at the higher rate, but the difference between the amount of SDLT paid under the higher rates and the amount of this duty that would be enjoyed at normal rates may be reclaimed if the old home is sold within 18 months.

Married couples: Married couples and civil partners who own one property at the end of the day of a transaction will not pay the high rates of SDLT. However, if either of them owns more than one residential property they may pay the higher rates when purchasing another property. Married couples and civil partners living together will be treated as one unit.  Therefore, they may own one residence between them at any one time for the purposes of the higher rates.

Penalties of up to 100% of the understated tax may be payable.

Given the need to pay additional SDLT upfront and claim it back later, buyers will need to consider the potential impact of a delay with their mortgage offer and/or the sale of their existing home and whether they are still be in a position to proceed before 1 April 2016.

The short consultation period ended on 1 February 2016. Confirmation of the final design was announced in the budget on 16 March 2016. The higher rates will then apply from 1 April 2016 unless exchange of contracts occurred before 26 November 2015. The government is also consulting on whether the 30 day period for filing SDLT should be reduced to 14 days from the effective date.

The consultation document which contains more explanation can be found here.