This update is further to our News Updates of 30 November 2015 and 25 July 2016 regarding the increases to SDLT rates for purchases of additional property which came into effect on 1 April 2016.
Recent figures from the Council of Mortgage Lenders show some 71,100 loans were advanced for house purchases by landlords in the year since the tax change compared with 142,100 loans in the previous 12 months. This suggests that mortgage activity in the UK “buy-to-let” sector has halved since the introduction of the stamp duty surcharge.
In addition, there have now also been profound changes to the taxation of “buy-to-let” investment reducing the amount that landlords can claim in mortgage interest tax relief.
Higher-rate taxpayers can no longer offset all of their mortgage interest against rental income before calculating their profits and tax due. This will lead to higher tax bills even if investors have not seen their income increase.
Mortgaged landlords will still be able to deduct some finance costs when calculating their taxable property profits as the reduction in relief is being phased in between now and 2020.
From 6 April 2017 landlords can offset only 75% of their mortgage interest against their profits. This falls to 50% next year, 25% in 2019 and zero in 2020.
As the deductions are gradually withdrawn they will be replaced with a basic rate relief tax reduction (i.e. landlords will pay tax on the full amount less tax relief fixed at 20%).
While the change mainly affects those who already pay higher-rate income tax, it will push some basic-rate taxpayers into the higher-rate bracket once their rental income has been taken into account. Others will lose means-tested benefits.
The change applies only to private individual landlords and not to those who own property through companies.
The government introduced these changes to SDLT and taxation in an attempt to slow the relentless rise in house prices. The tax receipts are said to be used towards doubling the affordable housing budget and help first time buyers, being part of the government’s commitment to supporting home ownership.
Please note that this information is provided for general knowledge only and therefore specific advice should be sought for individual cases.
For further information, please contact John Mills