6 April is the start of the new tax year and as is traditional, a new round of tax changes.
Here are the new tax rules that buy-to-let property investors in the 2019/2020 tax year.
Mortgage Tax Relief fades into oblivion
This isn’t exactly a new tax rule, the government has been reducing Mortgage Tax Relief since the 2017/2018 tax year, but this is the last year property investors will be able to claim any Mortgage Tax Relief and then only for 25% of their mortgage-interest payments. For the rest, they will receive a 20% tax credit, which will be all that is available from 2020/2021 onwards.
Therefore, now could be a good time for landlords to double-check their sums and ensure that investment properties can still earn their keep, even after these changes.
Landlords on higher incomes and/or with larger portfolios may wish to investigate the option of holding their properties within a limited company structure, although it is important to emphasise that it is illegal to do so purely for the purpose of avoiding tax.
There would have to be another consideration behind your decision, for example, the need for greater flexibility in how you run your company and possibly greater flexibility in inheritance planning.
Setting up a limited company does involve a degree of expense and general administration, so if you are interested in this option, it is recommended to start looking into it as soon as possible. Ask a lawyer if you would like assistance is setting up a limited company.
Income Tax bands change
In England and Wales, the personal allowance goes up to £12,500 and the point at which you pay the higher rate (of 40%) goes up to £50,001.
In Scotland, the personal allowance is also £12,500, but thereafter, there is a Starter Rate, Scottish Basic Rate and Intermediate Rate, in place of the Basic Rate and the Higher Rate threshold is £43,431 with tax being taken at 41%.
Capital Gains Tax (CGT) changes
The CGT threshold has also increased for 2019/2020. It is now £12,000, however, CGT is charged on the sale of investment properties (it is not usually charged on the sale of owner-occupied properties) and the rate is 18% for basic-rate taxpayers and 28% for higher and additional-rate taxpayers.
People who live in Scotland pay CGT at the same rates and according to the tax band they would have been in had they lived in England or Wales.
NB: Owner-occupied properties are currently exempt from CGT. Up to and including the 2019/2020 tax year, a person is automatically treated as living in their main home for the final 18 months of ownership, regardless of whether or not they were actually resident in the property at the time. As of next year, this will reduce to 9 months.
As a result expats who have become “accidental landlords” will have less time to “test the water” before taking any final decisions on their longer-term future in general and, specifically, whether they wish to continue to let out their UK property or whether they wish to sell it and buy again at a later date.