New buy-to-let tax rules: explained
1. Can I claim tax relief on mortgage interest?
Landlords used to be able to offset mortgage interest payments against rental income, but in 2015 the government announced they’re phasing this out.
In 2017-18 the tax relief you could claim reduced to 75 per cent. Fast-forward to 2019-20 and it’s only 25 per cent. Next year, it’ll be gone completely.
The government has replaced this with a 20 per cent tax credit, which isn’t as beneficial for higher-rate and additional-rate taxpayers. In 2019-20, you can apply the credit to 75 per cent of your mortgage interest.
To help mitigate the new rules, more and more landlords are setting up a limited company when buying a new rental property. This is because you’ll be subject to Corporation Tax rates of 19 per cent, rather than the higher individual income tax rates.
2. What about buy-to-let income tax…?
So what exactly are the individual income tax rates and bands for 2019-20? In some good news, the government has fulfilled its commitment to raising the personal allowance to £12,500 a year early. This is the amount you can earn before you start paying income tax.
The higher rate threshold also increases from £46,350 to £50,000, which is the point at which you start paying the higher rate of tax (40 per cent) on your profits. The additional rate (45 per cent) threshold remains unchanged at £150,000.
3. …and Capital Gains Tax rates for buy-to-let?
The government has also increased the Capital Gains Tax allowance for 2019-20. It goes from £11,700 to £12,000.
So if you’re selling a second property you get to earn more tax-free. But the Capital Gains Tax rate is higher for landlords – 18 per cent for basic-rate taxpayers, and 28 per cent for higher and additional-rate taxpayers.
4. Changes to Private Residence Relief from April 2020
At Autumn Budget 2018, the government announced some changes to Private Residence Relief rules for 2020.
At the moment, if you lived in your property before letting it to tenants, you get Private Residence Relief when you come to sell. This means you don’t pay any Capital Gains Tax for the time you lived in the property, plus an extra 18 months after you moved out. But under the new rules this reduces to nine months.
What’s more, the £40,000 of lettings relief (which you can claim if you rent out a property that’s been your main home) will only apply to landlords who share an occupancy with their tenants.
If you’re planning to sell it might be worth researching your options before April 2020 and speaking with a professional adviser.