What is the Future for Buy-to-let Investors?

Earlier this year, Chancellor George Osborne announced that stamp duty on buy-to-let properties will increase by 3%. As you can imagine, the new arrangements are causing prospective landlords and second home owners to rush property purchases through before the hike hits next year.

Let’s learn more about this increased tax on buy-to-let properties and how it’ll affect the future of investors.

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Stamp Duty Tax on Buy to Let Properties

When the new tax plans were unveiled in the summer budget it came as a huge shock, particularly as there was no consultation with the industry. It’s due to come into effect from April 2016 and the Institute for Fiscal Studies has said that there will be a “rush” for buy-to-let properties ahead of the new tax rates.

Unless a landlord owns more than 15 properties, who will bypass the charge, landlords will expect to pay an additional 3% on stamp duty. So, on a £200,000 house, landlords will be forced to fork out a whopping £7,500 in tax costs alone. This is significantly larger than the current £1,500 cost. The new tax doesn’t apply to houses up to £40,000, but once you go beyond this price the initial 3% of stamp duty charged up to £125,000 is charged on the whole property value.

What This Means for the Future

Currently, landlords are able to deduct mortgage interest before calculating how much tax they owe. However, as of next year, they will no longer be able to do this and will instead get a tax credit equivalent to 20% basic-rate tax on this amount.

As it stands, if you earn £20,000 a year from your buy-to-let property and it costs you £13,000 in mortgage interest, you would only need to pay tax on £7,000; whereas, with the new tax bill, you’ll owe tax on every penny of the £20,000.

However, due to the 20% tax credit for the £13,000 interest, you will receive £2,600 back. This means that if you’re a BR tax payer you’ll pay the same as you do now, but it’s not good news for higher rate taxpayers.

As a higher rate taxpayer, you’ll eventually have to hand over £5,400, whilst additional rate taxpayers would part with £6,400. It seems that it won’t be long before higher and additional rate taxpayers will end up making no profit at all after tax.

Who Will Suffer?

At a glance it looks like cash-rich landlords will be the ones to receive the blow, but Stephen McPartland MP and Craig Mackinlay MP of The National Landlords Association have argued that middle-earners will be affected too. They believe that the new taxes will push 150,000 landlords into higher tax brackets.

How? Landlords’ tax bills will be calculated before the interest is deducted, so more landlords on middle incomes will fall into the higher rate bracket once the full amount is accounted for.

The future depends on your personal position as a buy-to-let investor. Understandably, many landlords feel a surge of anger towards the new tax – however it may not be such a bad thing for those who are keen to get on to the property ladder.


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