The everchanging landscape of landlord tax can be difficult to navigate—unless you stay on top of changes in legislation from year to year.
Last month, I covered four of the eight major tax changes for landlords in 2020. Now it’s time to review the remaining four.
Increased Stamp Duty Surcharge on Residential Rental Properties
In 2016, the government introduced a 3% stamp duty surcharge increase, which applies to anyone buying a home that’s not their primary residence—and that includes buy-to-rent properties. Exceptions for landlords include if the home’s value is less than £40K; if it’s a mobile home, caravan or houseboat; if they’ve never before owned a property and their first purchase is a buy-to-let property; or if it is the only property they own.
For instance, if the property is located in England or Northern Ireland, and it’s worth £275K, a total of £12K stamp tax will be imposed. This amount is calculated in increments, with the first £125K of property value being subject to 3% stamp tax, £125K to £250K taxable at 5%, and £250K to £275K at 8%.
If the landlord and his or her spouse or civil partner only own one home, and they’re letting it to tenants, they will not have to pay the increased stamp duty surcharge rate. If the property is in addition to the primary residence, it will be subject to this enhanced stamp tax (unless the main residence is sold within 36 months, when they will receive a stamp duty refund). If they own the rental property as a company (not as an individual), it will be subject to increased stamp duty, even if it’s the only property the company owns.
Location does matter, so be sure to check local regulations and rates, which vary based on whether the property is in England, Northern Ireland, Wales, Scotland…or elsewhere.
Class 2 National Insurance
If a landlord is registered as a business, if letting properties is their primary source of income, if they let multiple properties, and/or they’re purchasing more properties, and they earn more than £5,965 annually, that landlord must pay Class 2 National Insurance. If the landlord earns less, they can still elect to pay full national insurance, so they receive full state pension.
Capital Gains Tax
The rate of capital gains tax varies for basic-rate taxpayers. The taxable amount is calculated by subtracting items like fees and major improvements from the market value of the property.
As of April 2019, capital gains tax must be paid by non-UK residents within 30 days of the property being sold. As of April 2020, the same deadline will apply to UK residents selling a property. What’s more, letting relief (a reduction for landlords who live in the properties they rent) will be eliminated, starting April 2020. Private resident relief may still apply, though.
If the landlord is renting property as a limited company (rather than as an individual), it’s possible that corporation tax can replace income tax and capital gains tax. This requires registration, a corporate tax return, and the reporting of corporation tax.
The bright side of Residential Letting, going forward
At a glance, the tax implications for residential rental properties can seem discouraging, and landlords are feeling the pressure. All the news is not bad news, however.
Landlords also feel optimistic about the buy-to-rent landscape. Demand for rental properties is sure to increase, mostly due to a lack of new construction, increased first-time buyer challenges, and political uncertainty. And we all know what comes with increased demand: increased rental rates.
New income opportunities are being realised in furnished holiday let properties, which happen to be exempt from the mortgage interest tax relief changes. Couple this with an increase in stay-cations in the region, and property owners are finding new ways to maintain their profit margins.
When a landlord stays in compliance with tax laws, and uses those laws to adjust their business to maximise tax benefits, they can stay in business…and remain profitable.
Rochelle Trup is the co-founder of Arthur Online