By 2020-21, property investors will only be able to claim basic-rate tax relief on their finance costs for residential properties, which include mortgage interest, interest on loans to buy furnishings, and fees incurred when taking out and repaying mortgages and loans.
The proportion of costs that receive full relief will reduce by 25% a year over four years. This will affect landlords who pay higher-rate tax and could move many landlords into a higher-rate tax bracket.
The biggest problem with the change is that most landlords are completely unaware of it. While investors with a large portfolio might be planning ahead, many with small portfolios alongside a full-time job have no idea what is about to happen. You need to be able to crunch some numbers.
What can be done to minimise the impact of the changes? Whatever you do, there’ll be a cost involved in changing things.
Is it worth forming a Limited Company? The capital gains tax on that move ends up being very prohibitive if you have owned the property for some time. A self-employed property investor can claim incorporation relief, but they must pay stamp duty as a sole owner selling a property to a limited company.
All of the changes in the property sector, including the 3% stamp duty surcharge on buy-to-let purchases and the abolition of the wear and tear allowance means there is more to consider when owning, or considering purchasing a buy-to-let property.
Air BnB Rentals
A simplification measure aimed at those renting out a property through Airbnb is a property allowance for individual landlords whose total property receipts for the tax year (the income that they would bring into account in calculating their property profits) do not exceed £1,000.
This income is not chargeable to income tax. Where total property income exceeds £1,000, landlords may elect for partial relief, whereby they are simply taxed on their income above £1,000 but with no allowance for expenses, instead of calculating their taxable profits in the usual manner.
Rent a Room Relief
Income from renting out a room to a lodger may qualify for ‘rent-a-room’ relief, if:
- Your gross rent-a-room income does not exceed £7,500 for the tax year (before the deduction of any expenses)
- The source of the income relates to letting a room in your only or main residence, and
- The income arises from the letting of furnished accommodation in a ‘residence’ in the UK, or from associated goods and services (for example providing meals, cleaning or laundry services to a lodger)
If all the above conditions are met, the income is exempt from tax. You do not need to do anything for the exemption to apply; it will apply automatically unless you ‘opt out’.
New Energy Efficiency Standards
New legislation that came in on 1 April 2018 means it will be illegal to let out a property if its Energy Performance Certificate (EPC) band is F or G. The rules are quite complicated so it’s worth seeking professional advice to check whether and when you need to comply.
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For an informal chat or to discuss property income, contact Dawn on 01969 624999.