Busting the Tax Myths in property investing by Bronwen Vearncombe

Investing in property provides a great opportunity for not only cashflow each month but also capital growth over the long term. The UK is of course an island, limiting expansion, but our population is growing much faster than housing availability. So economically it’s also a great investment because of the high rental demand.

Now if you’ve kept an eye open and read the newspapers over the last few years, you might understand that the government have changed various tax elements, which could mean that some investors may need to pay more tax. However, if you are keeping informed and learning with an expert, you will understand what and how to manage your overall position.

Two things that have changed over the last five years are Stamp Duty and Income Tax allowances.

Stamp Duty

Stamp duty land tax, also known as SDLT or just stamp duty, was originally introduced in 2003 and revised in 2014 and 2015.
It is payable on the purchase of British land and property. For self-builders, stamp duty is payable on land but not on build costs.
SDLT applies to the majority of sales and transfers of land or property.

From April 2016, anyone buying a second property in the UK, including a buy to let property, would pay an additional 3% on top of the relevant standard rate band.
The rates and thresholds are:
• 0% on properties under £40,000
• 3% between £0 and £125,000 (unless the property is below £40,000)
• 5% between £125,000 and £250,000
• 8% between £250,000 and £925,0000
• 13% between £925,000 £1,500,000
• 15% on anything over £1,500,000

Income Tax for Landlords

Up until the 2016/17 tax year, landlords could deduct mortgage interest and other allowable costs from their rental income, before calculating their tax liability. The Finance Act 2015 changed this.

From 6 April 2020, tax relief for finance costs will be restricted to the basic rate of income tax, currently 20%. Relief will be given as a reduction in tax liability instead of a reduction to taxable rental income. The changes started to be phased in from April 2017.

As a landlord you can deduct ‘allowable’ expenses before your tax bill is calculated, for example, maintenance costs, lettings agent fees and insurance premiums.

Let me blow away some of the myths for you.

Myth:
• Tax – I’ve heard that changes in the tax treatment of buy-to-let property have made investing unprofitable.

Solutions:
• Section 24 of the Finance Act 2015 (mentioned above) means that you will no longer be able to claim mortgage interest, or any other property finance, as tax deductible. So this only applies if you have a loan on the property.
• If you are a higher rate taxpayer or are close to being one, this could have a big impact. My advice is to speak with a specialist property tax accountant who can look at your specific situation.
• There are ways to mitigate some of the impacts, including choosing the best strategy where this doesn’t apply, like holiday letting, or buying in a limited company.

Myth:
• Additional stamp duty when you buy a second property increases the costs of purchase and makes it much less profitable

Solutions:
• There are opportunities to buy significantly below the market value when a vendor needs to sell their property fast and need certainty.
• If you buy a property that needs refurbishing you can claim back much of the costs of repair and replacement of existing assets against your tax.
• If you can add significant value to a property such as creating additional bedrooms, extending or splitting the property into flats, then you would be able to refinance to take the equity out.