Buy-to-let Landlords: Tax rules in 2019/2018 Jun 2019
In the lead up to the 2019/20 tax year it had been public knowledge for some time that a shake-up was on the horizon and, as a result, the tax rules surrounding buy-to-let landlords was going to change.
As things stand, just over six weeks into the new tax year, landlords have had to deal with the likes of a reduction in interest relief, but for man that is just the beginning of the changes.
Buy-to-let tax changes
For a lot of landlords this article is going to get really serious, really quickly, so it may be best to kick off with some nice news before the skies darken over your respective device’s screen.
Increase to personal allowance
What was once £11,850 is now £12,500 - yes, that’s right, as of April 6th just gone by you won’t pay a penny of tax until you earn more than £12,500. Better still, it means you’ll need to hit the £50,000 mark before you start forking out 40% income tax on your earnings.
Beware, though. For those making a comfortable income from being a landlord, your personal allowance does decrease by £1 for every £2 you earn over £100,000.
Changes to Capital Gains Tax allowance
If the new landlord tax rules are the last straw for you and you’re planning on selling, you’ll be happy to know that less of your profits from selling will be liable for capital gains tax.
In the current tax year, the capital gains tax allowance has rise to £12,000, up from last year’s £11,700.
An important side note to this increase in allowance is that if you happen to be selling a property of which you have joint ownership with a partner or spouse, there is a possibility of clearing £24,000 in profit before tax kicks in.
With regards to capital gains tax rates in 2019/20, those who pay the basic rate will be taxed at 18%, while those in the higher-rate will be taxed at 28%.
Changes to mortgage interest relief
Here’s where the “fun” starts.
Since April 2017, HMRC have been phasing out mortgage interest relief, whereby landlords had the option to deduct any interest paid on their mortgage from their rental income, thus reducing their tax bill at the year-end.
As of April 6th this year, landlords have new mortgage interest relief rules to content with.
In the 2019/20 tax year, 25% of interest paid by landlords on their mortgage can be deducted from their rental income, and this will drop to 0% come next year - putting a definite end to mortgage interest relief in the UK.
As an alternative, the government has introduced a new tax credit in conjunction with phasing out mortgage interest relief.
This year, landlords will have a 20% tax credit that can be applied to 75% of mortgage interest paid in the current tax year.
While this is good news for taxpayers who pay the basic rate of tax, those in the higher or additional brackets will be footing much higher tax bills on their mortgage interest,
What is rent-a-room?
A scheme originally designed to incentivise homeowners to let their spare rooms, Rent-a-Room has been taken advantage of by landlords who, in not fulfilling the schemes intentions, have been claiming tax-free profits of £7,500 by renting rooms in properties which they do not live in as a resident themselves.
In an effort to stop landlords earning tax-free profits through the scheme, new rules being put into place will mean homeowners have to be present and use the property in question as their main residence in order to avail of the incentive.
Capital Gains Tax could undergo major shuffle in 2020
Capital gains tax rules differ for landlords depending on how/if they used the property prior to letting it out on the market.
For those who previously lived in the property before letting, they can let the property for 18 months after moving out themselves before becoming liable to pay capital gains tax on a sale of the property.
Furthermore, after the previously mentioned 18 month period passes, said landlord could avail of as much as £40,000 in lettings relief to help reduce their tax bill.
But hear this - don’t get too comfortable, landlords. The above rules could very well change come this time next year.
Following a proposal made during last year’s Budget, the 18 month period mentioned above would be halved to 9 months, and letting relief would strictly only apply to live-in landlords.
As mentioned, these changes are still being considered and are not yet absolutely going to be adopted into tax law. But should they pass, the rules will come into effect from April 6th, 2020.
If you’d like to read more on these particular changes to Principal Private Residence Relief, we have put together a comprehensive guide on it.