After the Summer Budget, it was clear that landlords were being targeted with the removal of the 10% wear and tear allowance from April 2016 and the finance cost restrictions coming in from April 2017. However, if you thought it would stop there, you were wrong. It now appears that there will be further ramifications for landlords and second home owners, as announced at the Autumn Statement. Going forward, into 2016, it is essential buy to let landlords and second home owners are aware of:
Stamp Duty Land Tax
The Autumn Statement brought further bad news for landlords when it was announced that an additional 3% will be added on to stamp duty land tax on any buy to let purchases or second homes. This tax will apply to any property exceeding £40,000 and will be coming into effect from April 2016. This increase will be crippling for many potential landlords as the stamp duty will be applied to the full property price, for example a £250,000 property will incur a £8,800 stamp duty tax, previously this was £2,500 – a significant increase.
The only residential properties excluded from this tax increase will be caravans, mobile homes and house boats.
Consequently, I expect that many landlords and potential second home owners may decide to take advantage of the lower tax rates pre April 2016 and accelerate their plans to purchase property before this date. Therefore, in the short term we may see property prices increase with the demand before all going quiet in April 2016.
It is worth noting that this proposed change currently only applies to landlords as individuals and not limited companies. Therefore, post April 2016 it may be beneficial for some investors to transfer to a limited company in order to manage their property portfolios. The government is, however currently consulting on whether or not these stamp duty changes should apply to corporates and funds that own more than 15 residential properties, as well as individuals. The outcome of which should be announced early next year and will dictate the approach landlords take post April 2016.
Wear and Tear Allowance
Landlords that let properties to tenants on a furnished basis are able to claim a 10% wear and tear allowance deduction. However, from 6 April 2016, the 10% wear and tear allowance will be removed and instead landlords will be able to deduct the cost of replacing any furnishings within the property.
This is bad news for landlords as the 10% wear and tear allowance usually far outweighs the cost of repairing or replacing furniture.
Finance Cost Restrictions
The Summer Budget brought some significant changes that are set to effect landlords who fall in to the higher rate tax bracket from 6 April 2017. These changes will affect finance costs and the changes will be phased in over a four year period. The government has brought this in with the intention of making the tax system fairer by ensuring that landlords with higher income do not receive the most generous tax reliefs.
These changes are without doubt going to affect the viability of property investments. For those worst hit and with large portfolios they may consider selling off some of their property to repay mortgages. However, this is not always practical and in some instances may make matters worse. Alternatively, landlords could consider incorporating their portfolio, as the above changes will only affect the tax relief of individuals, not incorporations. Although this may trigger other taxes and will not work in every circumstance. Furthermore, with the controversial change to dividends (which was also announced at the Summer Budget), it means further tax will be due if the individual wishes to extract income from their portfolio, rather than reinvest.