HMRC continues to attack investment properties

Significant changes to the taxation of investment properties will affect buy to let landlords and second home owners as follows:

Stamp Duty

For properties purchased as investments or second homes, there will be an additional stamp duty charge of 3% on top of the existing stamp duty, effective from 1 April 2016. For a property costing £200,000, this will mean an increase in stamp duty of £6,000.

Capital Gains Tax

Although CGT rates are reducing to 20% for higher rate taxpayers and 10% for basic rate taxpayers from April 2016, these reduced rates do not apply on buy to let properties or second homes. These will continue to be taxed at a rate of 18% or 28%.

Mortgage interest

Currently, all of the interest paid on a mortgage relating to a buy to let property is allowed as a deduction against the rental income.

From April 2017, a phased reduction in tax relief for higher rate taxpayers is being introduced. By 2020, tax relief on mortgage interest will be completely replaced by a 20% tax credit on the mortgage interest paid, with tax payable at 40% on the rental income. This effectively restricts tax relief on mortgage interest to basic rate.

A property generating rental income of £12,000 with mortgage interest of £6,000 would currently give rise to a tax liability of £2,400 for a higher rate tax payer. By 2020, the tax liability will have risen to £3,060.

Should you wish to discuss any of the changes arising for to buy to let properties, please contact your local Lentells office.