New rules for wear and tear
Before April 2016, if a buy-to-let landlord leased property to a tenant as fully-furnished the landlord could automatically claim an amount against rental income as wear and tear. This was set at 10% of the rent received.
After April 2016, all landlords will be able to deduct the costs of replacing furniture. So the good news is that this deductibility of costs has been extended to include landlords of unfurnished and partly furnished homes. The bad news is that deduction is no longer automatic and that claims are limited to replacement of items that are provided for the use of the tenant. Such items include:
- Movable furnishings such as beds and sofas
- Televisions
- White goods
- Carpets, curtains, and linen
- Crockery and cutlery
Items that would normally be sold as being integral to the home (e.g. baths, sinks, boilers, toilets) are not included.
Further, deductions can only be made upon the provision of receipts that detail the cost of the replacement made.
New stamp duty changes
Stamp duty that is payable on the purchase of a property is being increased for buy-to-let investors. Of course, when it comes to selling the investment property the stamp duty paid can be deducted from the gross capital gain (as we saw earlier) but this still represents a substantial increase in the initial outlay for an investor.
The Chancellor of the Exchequer has called this new charge the ‘stamp duty surcharge’. It is set at 3% for all investment properties, though properties under £40,000 will remain exempt from stamp duty. The easiest way to see this in action is to look at it in a tabulated form:
| Price of Property | Normal Stamp Duty Rate | Stamp Duty Rate for additional properties | Gross amount payable by an investor |
| Up to £40,000 | 0% | 0% | £0 |
| Up to £125,000 | 0% | 3% | £1,200 – £3,750 |
| £125,000 – £250,000 | 2% | 5% | £3750 – £10,000 |
| £250,000 – £925,000 | 5% | 8% | £10,000 – £64,000 |
| £925,000 – £1,500,000 | 10% | 13% | £64,000 – £138,750 |
| £1,500,000 + | 12% | 15% | No maximum |
So let’s take a look at 3 examples of properties:
- John buys a £185,000 property. Stamp Duty Payable £6750
- Cindy buys a £325,000 property. Stamp Duty Payable £16,000
- Rob and Natalie buy a £550,000 property. Stamp Duty Payable £34,000
Mortgage Interest Tax Relief – The elephant in the room?
Prior to April 2017, a buy-to-let investor can claim all the buy-to-let mortgages interest that he or she pays against the rental income produced by his or her property. This is a big positive for all property investors, but especially for those that pay a higher rate of tax.
For example, let’s say a higher rate taxpayer owns an investment property on which the rental income is £1,000 per month and mortgage interest payments are £600 per month. Over the course of the year, the investor would make a net £4,800 in rental income. (For ease of calculation, and to show the impact of the changes being made, we’re not including any of the other deductions that an investor could claim.) The tax that the higher rate investor would be liable to pay is £1,920. The investor’s net gain after tax is £2,880.
A basic rate taxpayer in the same scenario would pay £960 in tax and have a net gain after tax of £3,840.
UK Property Tax ebook and calculator
In my latest book, UK Property Tax ebook, we explore the most current tax issues after the UK tax changes and their impact on property investment.
Importantly, we’re going to examine the changes that will affect buy-to-let investors after UK Budget 2016 and beyond and get to the bottom of how they will affect you as a property investor.
Live with passion and fun,
Brett
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