Buy to let tax changes 2020

Buy to let tax changes

You may be interested in our main article “buy to let tax for UK landlords”. This article discusses all the different types of tax that you need to be aware of as a UK landlord.

Updated August 2020

There are always changes in the world of buy to let. In this page, we will explore the many types of taxes that you need to be aware of in the world of buy to let property investing.

The types of buy to let tax is:

– Stamp Duty Land Tax is also known as SDLT (when you are buying a property)

– Value Added Tax also is known as VAT (when you are buying a commercial property or refurbishing a buy to let property)

– Income tax (on the profits you make in your personal name)

– Corporation tax (on the profits you make in a limited company)

– Capital Gains Tax is also known as CGT (when you sell a buy to let property)

– Inheritance Tax is also known as IHT (when you pass away)

I have purposefully provided updates in the below sections that covers both 2019/20 and 2020/21 tax years. I wanted to ensure that you were aware of the latest buy to let tax changes, but I am aware that you may not have caught up on last year.

Impact of buy to let tax changes

HMRC will always try and increase the personal allowance and tax bands. This means that individuals will be able to earn more before they pay tax. The same applies to the Capital Gains Tax annual allowances, which means the amount of money you can earn from a capital gain increases from year to year.

The impact of the mortgage tax changes (Section 24) means that UK landlords with buy to let mortgages will pay more tax.

Stamp Duty Land Tax changes

Stamp Duty Land Tax or SDLT is the tax that you pay when you purchase a buy to let property. The question is when do you pay SDLT and how much do you pay?

When do you pay SDLT?

SDLT is paid within 14 days of completion, in most cases. I say most cases because it is not always the case. SDLT is chargeable on the money paid for the option agreement even though the property does not exchange/complete

There have been a number of recent SDLT changes that you need to be aware of:

The SDLT rates that apply to both residential buy to let properties and commercial properties

SDLT may be removed when you incorporate your property to let property portfolio into a company

SDLT holiday from 8th July 2020 to 31st March 2021. No SDLT payable on property purchases under £500,000

Stamp Duty Land Tax Calculator – £9.95

This SDLT calculator will tell you how much is to pay and how to reduce it further.




Value Added Tax tax changes

There are no tax changes that affect buy to let property investors in recent years. VAT does not apply to buy to let rental income. This means that you cannot charge VAT to the tenant. This also means that you cannot claim back the VAT on the refurbishment works you have done to the property.

Download your buy to let tax guide here, written by our property accountants

Buy multiple properties form the same vendor to claim multiple dwellings relief to reduce Stamp Duty Land Tax

If you want to know more then please read our “buy to let tax tips for UK landlords” article

Income Tax changes

The amount of tax that you pay will be as follows as UK domiciled individuals

0% – £1 to £12,500 – personal allowance (money you can earn before you pay tax)

20% – £12,501 – £50,000 – basic rate tax band

40% – £50,001 – £150,000 – high rate tax band

45% £150,001+ additional rate tax band

Tax rates for non UK residents 

There are different rates for non-residents that are not based on the EEA or British colonies. You also need to be aware that the above income tax rates do not apply if you are resident in the UK but wish to be treated under the remittance basis

20% – £1 – £37,500 – basic rate tax band

40% – £37,500 – £137,500 – high rate tax band

45% £137,500+ additional rate tax band

Buy to let mortgage tax changes (Section 24)

Due to Section 24 mortgage interest relief you are no longer able to offset the full amount of the mortgage interest that you are charged on your buy to let property.

The above tax bands shown in the previous section will therefore not apply to UK landlords that have residential buy to let properties that have a mortgage. You will need to calculate the tax at your tax band but must exclude the mortgage interest costs. Once you have identified the tax you pay then you will be able to claim a 20% tax reducer on the mortgage interest paid

Impact on buy to let tax changes for Ben

Ben has a small property portfolio and generates the following financials

– £10,000 rental income

– £2,000 costs of running the property – excluding mortgage interest)

– £2,000 mortgage interest cost

– £6,000 profit (which will be taxed at 40% as a high rate taxpayer)

Example: Section 24 impact ion bens buy to let property portfolio

However, due to Section 24 mortgage interest relief cap, we need to rework the profit as follows:

– £10,000 rental income

– £2,000 costs of running the property – excluding mortgage interest)

– £8,000 profit (which will be taxed at 40% as a high rate taxpayer)

– £3,200 tax payable at 40%

Ben will receive a 20% tax reducer based on the mortgage interest cost of £3,000

– £2,000 mortgage interest (receives a 20% tax reducer)

– £400 tax reducer

Example: Net tax Ben will pay on his buy to let property portfolio due to Section 24 mortgage interest relief cap

The net tax that Ben will pay is

– £3,200 tax payable at 40%

– £400 less the 20% tax reducer

– £2,800 net tax paid on his buy to let property portfolio

We can see here that Ben’s actual effective tax rate due to Section 24 mortgage interest relief cap is

46.6% (£2,800 net tax paid divided by the actual profit made of £6,000 times by 100)

There are many ways where you can mitigate Section 24 mortgage interest relief cap

Corporation tax changes

Boris Jonson before he came into power suggested that the corporation tax would reduce from 19% down to 17%. Sadly, when Boris Johnson came into power he broke his promise and kept corporation tax at 19%

Capital Gains Tax changes

The amount of money you can earn from a capital gain before you pay tax increased to £12,300. Again this is different to for non-residents as they will not benefit from this CGT annual allowance.

In recent times the amount of CGT paid after the annual CGT allowance was reduced as follows

– 10% for basic rate taxpayers

– 20% for high rate taxpayers

Sadly for UK landlords, George Obsoborne did not decrease the CGT rates on the disposal of a buy to let property. As such the CGT rates for selling a property investment remains:

– 18% for basic rate taxpayers

– 28% for high ratepayers

There are a number of other changes that you need to be aware of:

Private Residence Relief is reduced from 18 months to 9 months

Lettings relief effectively removed unless you lived with a tenant

Capital Gains Tax Calculator – £9.95

This CGT calculator will tell you how much is to pay and how to reduce it further.



 

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