The rules on property tax relief are changing. These changes could have significant implications for those wishing to rent out or purchase additional properties.
These changes have likely come about due to new figures revealing that multiple property ownership has dramatically risen in recent years. The new tax changes could affect a substantial amount of people, so let’s take a closer look at these changes and what they really mean.
The Resolution Foundation has published research that suggests as many as 5.2 million individuals in the UK now own more than one property. In addition to this, a think-tank has discovered that the number of multiple property owners has risen by 30% between 2002 and 2014.
It seems the Government has taken note of these figures and have gradually been phasing in a number of new measures to target those who own more than one home. A prime example of this is charging higher rates of Stamp Duty Land Tax (SDLT) for buyers of second homes in England, Wales and Northern Ireland. Similarly, a 3% supplement has been introduced in Scotland, where property transactions are governed by the Land and Buildings Transaction Tax (LBTT).
Also, beginning earlier this year in April and being phased in over the course of the next four years, finance costs relief for individual landlords will be restricted to the basic rate of income tax. Finance costs include mortgage interest, interest on loans to purchase furnishings and the fees incurred when withdrawing or repaying mortgages or loans.
This means that landlords will no longer be able to deduct the finance costs from their property income in order to arrive at their property profits. Instead, a basic rate reduction from their income tax liability will be made to them for their finance costs.
For tax year 2017/18, the deduction from property income will be limited to 75% of finance costs, the remaining 25% will be available as a basic rate tax reduction. For the next three years, the direct deduction of finance costs will fall by 25% each year until 6th April 2020. By this time, all finance costs incurred by landlords will be given as a basic rate tax deduction.
All of the above begs the question, what can you do to avoid the pitfalls? It is quite clear that the Government is seeking to clamp down on individuals owning more than one home, so it is absolutely vital that you make yourself aware of the tax obligations of owning multiple properties.
Recently, HMRC has outlined a range of common tax errors made by multiple home owners. They have disclosed that many individuals fail to declare rental profits to HMRC because they do not consider themselves to be a landlord for tax purposes. For example, someone might inherit a property or move in with someone and neglect to check if there are any tax implications for renting out the vacant property.
If you have any questions or need some advice, please do not hesitate to get in touch with me by emailing firstname.lastname@example.org or by calling 01603 616300.