Property Investment and Taxation
Buy to let can be an attractive opportunity, generating both a regular income (which can cover relevant outgoings) and also the prospect of capital growth. Although interest rates are currently low, the rental yield on most rental properties are not as attractive as they once were as an asset class. Therefore, in our opinion, the likelihood of capital growth should be a serious consideration before undertaking a buy to let investment.
Tax in Rental Income
Income tax is payable on the rents received less allowable deductions. In the recent Budget there was a fundamental change which affects the tax relief on mortgage interest:
Landlords will no longer be able to deduct all of their finance costs from their property income. They will instead receive a basic rate reduction from their income tax liability for their finance costs. To give landlords time to adjust, the change will be introduced gradually from April 2017, over four years. The restriction in the relief will be phased in as follows:
in 2017/18, the deduction from property income will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction
in 2018/19, 50% finance costs deduction and 50% given as a basic rate tax reduction
in 2019/20, 25% finance costs deduction and 75% given as a basic rate tax reduction
from 2020/21, all financing costs incurred by a landlord will be given as a basic rate tax reduction.
Tax on Sale of a Property
Capital gains tax (CGT) is payable when the property is sold. The tax will be charged on the disposal proceeds less the original cost of the property and relevant legal costs. There are also certain tax allowances / reliefs that can be applied to further reduce this taxable gain.
Although CGT is generally charged at 10% and 20% for basic rate and higher rate taxpayers respectively, the rates are higher for residential property sales at 18% and 28% where the property does not qualify for private residence relief.
From April 2019, a payment on account of any CGT due on the disposal of residential property will be required to be made within 30 days of the completion of the disposal. This will not affect gains on properties which are not liable for CGT due to Private Residence Relief.