By Rob Barron 14/1/2016

 

The buy-to-let market is braced for a major hit when several tax changes take effect from this April. While some landlords have vowed to fight the changes in court, the industry is divided on whether this marks a long-term attempt to deter buy-to-let.

The package, introduced in the recent Autumn statement, has two key changes that make buy-to-let less attractive. The first is to stamp duty where anyone buying a property as a buy-to-let or second home will now face a surcharge of three percentage points on top of the usual stamp duty rate.

The surcharge affects properties of all prices and while the raw cost of the surcharge will of course be higher with more expensive properties, landlords will take a proportionally bigger hit with cheaper homes. 

For example, while tax on that portion of a purchase price over £1.5 million rises from 12 percent to 15 percent, the portion between £125,000 and £250,000 has an arguably more significant rise from two percent to five percent. Meanwhile the biggest impact comes with the first £125,000 of any property purchase, which has no stamp duty for ordinary buyers but will now attract a charge of three percent for buy-to-let.

The second big change is to mortgage interest tax relief for buy-to-let landlords. At the moment they can simply class mortgage interest on the property as a deductible expense, reducing the income on which they pay tax. From April this mortgage interest won't be a deductible expense but will instead attract a 20 percent tax credit.

For a landlord who's a basic rate taxpayer, the net effect will remain the same. For those who pay higher rate taxes, they'll be worse off overall. The effect will be significant, and will worsen if and when interest rates rise.

Two landlords have already launched a campaign to challenge the changes in court. They say the tax changes could be inherently illegal for a couple of reasons: unfairly discriminating between owner-occupiers and landlords; and failing to treat mortgage interest as a legitimate business expense, thus effectively taxing turnover rather than profits.

Tax treatment depends on the individual circumstances of each client and may be subject to change in the future 

The information within this blog is for information purposes only and is based upon our interpretation of current HM Revenue & Customs guidance which is subject to change.