Changes to Tax Treatment of Buy to Let Properties and Second Homes

April 12, 2016 12:32 pm Published by Steph Roffey

The 1^st of April saw the implementation of the first of a number of taxation changes impacting those purchasing or owning buy to let properties or second homes.

The growth in the “buy to let” market and the increase in individuals buying second properties over recent years have certainly had their critics with them being blamed, in part, for the overheating of the property market and many first time buyers being unable to afford their first home. With “buy to let” lending making up 12% of the total mortgage approvals in the UK it isn’t surprising that the Chancellor turned his attention to these sectors of the property market with some fairly stringent taxation changes.

Increases to Stamp Duty

An additional 3% stamp duty payable on “buy to let” properties and second homes came into effect on 1^st April adding thousands to property transactions and making landlords (or those purchasing a second property) paying 5 times more than a private buyer.

So what does the increase mean in practice?

Someone purchasing a £200,000 second home or “buy to let” property before this month would have paid stamp duty of £1,500. That is 0% on the first £125,000 of the property value and 2% on the balance.

The amount of tax payable in each band has now increased by 3%. This means that a similar transaction this month and beyond would see tax of 3% payable on the first £125,000 with a further 5% on the balance. A total bill of £7,500.

The table below shows the difference to tax rates payable across the property bands.

Band	Existing Residential SDLT rates	Rates for Landlords & Second Homes
£0-£125k	0%	3%
£125,001-£250k	2%	5%
£250,001-£925k	5%	8%
£925,001-£1.5m	10%	13%
£1.5m+	12%	15%

How do I know if I will be impacted?

Whilst on the whole anyone buying a second propery (whether or not as a “buy to let”) will be impacted by the change there are some circumstances in which they won’t.

The flow chart below shows a quick way to review your property transactions to see whether it would fall into the new stamp duty rates.

who_is_affected

Additional considerations to note

A married couple or civil partners living together will be treated as one unit for the purpose of the tax increases. Homes owned by either partner will be included when ascertaining the stamp duty bill on the purchase of another property. This means that an individual buying a property may be liable for the higher stamp duty if their partner has an existing residential property. They will however, be able to claim a refund within 18 months if one sells their residential property.

The change will impact on those who own property around the world and not just in the UK. A foreign homeowner buying in Briton or a Briton buying a holiday home would therefore be impacted and required to pay the higher rate of tax on the transaction.

Exemptions

There are a number of exemptions to the increased stamp duty rates including caravans, mobile homes and house boats as well as Charities and registered social landlords who will continue to be exempt.

Need further help in understanding the changes and the potential impact on your property transaction, give us a call on 0117 3790810.

Reductions to Tax Relief on mortgage interest payments

In addition to the increases in stamp duty payments, landlords face a further tax penalty with a reduction in the amount of tax relief they are able to claim on their mortgage interest payments. These changes, which come into effect from April 2017, will see the introduction of a flat rate of relief of 20% rather than the current tiered rates based on marginal rates of tax.

Currently a basic rate taxpayer would get 20% tax relief, those at a higher rate 40% and top rate taxpayers 45%. The change won’t have any impact on basic rate tax payers but those on higher rates will lose a significant amount of interest payment relief resulting in reductions to their profits.

Need a Hand?

If you are looking to purchase a second property, are a landlord or are intending to purchase your first buy to let property and would like some friendly advice on the impact of these tax changes or how to deal with them, give our team a call on 0117 3790810.

Author
Recent Posts

Steph Roffey

Steph is a Chartered Accountant with many years’ experience working in audit compliance and general accountancy. She is a Fellow of the ICAEW and has extensive knowledge of accountancy and tax for the self employed.

First Call Financials

accountants bristol