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Laura Gittins
05/03/2021 09:16
Revealed - seven new buy-to-let tax rules landlords should know about for 2021
In recent years, landlords in the UK have had no choice but to get used to major tax changes, and that looks set to continue in 2021 with a number of definite and potential alterations in the offing.

From the tax relief you can claim on buy-to-let falling to zero, to speculation about increases to Capital Gains Tax, there is a lot to keep an eye out for.

Here is our rundown of what’s been announced and what to look out for.  

Tax relief on buy-to-let mortgages falls to nothing

Not a new one exactly, as mortgage interest tax relief has been slowly phased out since April 2017, but the 2020-21 tax year is the first full year where landlords can’t deduct mortgage expenses from rental income. Rather, landlords now get a 20% tax credit on interest payments, restricted to the basic rate of income tax.
Previously, landlords were able to offset mortgage interest payments against rental income, but in the Summer Budget 2015 the then-Chancellor George Osborne announced this would be phased out over four years.

In 2017-18, the tax relief you could claim fell to 75% and by 2019-20 it was down to only 25%. Now it’s gone completely, with April 2020 to April 2021 the first tax year where the amount you can deduct is 0%.

The government has replaced this with a 20% basic rate tax credit, which isn’t as beneficial for higher-rate and additional-rate taxpayers, the category the majority of landlords fall into.

To help mitigate against the new rules, more and more landlords are setting up a limited company when buying a new rental property. This act – known as incorporation – helps because a property or portfolio of properties in a limited company is only subject to Corporation Tax rates of 19%, rather than the higher individual income tax rates.

Recent research from high-end estate agent Hamptons found that a record 41,700 new buy-to-let limited companies were formed in 2020, an increase of 23% from 2019.

What’s more, it said more companies were set up to hold buy-to-let properties between early 2016 - when the 3% stamp duty surcharge on buy-to-let properties was introduced - and the end of 2020, than in the preceding 50 years combined.  

At the end of 2020, there were a total of 228,743 buy-to-let companies up and running, an all-time record. Incorporation has its pros and cons, so it’s best to speak with a tax expert before you make any decisions, but it’s clear an increasing number of landlords are taking this route for the tax advantages it provides.

What are tax rates for buy-to-let in 2021?

The government increased the Capital Gains Tax allowance for 2020-21, up from £12,000 to £12,300.
As a result, if you’re selling a second property, you potentially get to earn more tax-free. But the Capital Gains Tax rate is higher for landlords, as most fall into the higher paying tax categories. The tax is currently 18% for basic-rate taxpayers, and 28% for higher and additional-rate taxpayers.

These rates may change when we enter a new tax year in April, so keep an eye out for announcements and we’ll keep this page updated.

Changes to Capital Gains Tax on buy-to-let

The Capital Gains Tax system is currently under review, and there is a chance Chancellor Rishi Sunak could announce increases in the Budget to claw back some of the huge amounts of money spent on dealing with the coronavirus crisis.

In November last year, the Office for Tax Simplification – carrying out a review on the request of Sunak - recommended an overhaul of Capital Gains Tax on property, which includes reducing the capital gains tax-free allowance and increasing Capital Gains Tax to be more in line with income tax rates.

While nothing has been announced just yet, this could make selling your investment property more expensive in the future as Capital Gains Tax is paid on property that is not your main home. Only approximately 265,000 people pay the tax each year, so there are concerns that the government will see it as an easy win and strike another blow for landlords when it comes to tax.

We will know more after the Budget next week.

Private Residence Relief is restricted

This is the first full year Private Residence Relief has been restricted since rules on Capital Gains Tax changed in April 2020.

Before, if you lived in your property before letting it to tenants, you’d get Private Residence Relief when you came to sell, meaning you wouldn’t pay any Capital Gains Tax for the time you lived in the property, plus an extra 18 months after you moved out. However, under the new rules, this has been reduced to nine months.
In addition, 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.

Buy-to-let income tax rates 2021 – what are they?

So, what exactly are the individual income tax rates and bands for 2020-21? Your personal allowance is the amount you can earn before you start paying income tax, which currently stands at £12,500 – no increase from last year.

The higher-rate threshold for rental income rose last year to £50,000. This is the point at which you start paying the higher rate of tax (40%) on your profits. The additional rate (45%) threshold remains unchanged at £150,000.

One-off wealth tax proposals

To help the country recover from the economic cost of Covid-19, it has been rumoured that the government is considering a one-off ‘wealth tax’ instead of increasing income tax or VAT this year.

The tax experts at the Wealth Tax Commission have proposed an additional 1% tax for those with assets over £500,000, or £1 million for married couples. Debts such as mortgages on a property would not be deductible, though.

The Treasury said it had already taken steps to ensure the wealthy pay their fair share of tax and has shown no strong indications that it will consider implementing the proposals from the Wealth Tax Commission, a body made up of academics, policymakers and tax practitioners, to try to get back some of the £280 billion being spent on fighting coronavirus.

Again, we should find out more about this at the Budget.

Stamp duty holiday extension

The stamp duty holiday is now highly likely to be extended for three months to the end of June, after a relentless campaign from MPs, the industry and the public, including a petition with more than 150,000 signatures and a parliamentary debate on the matter.

Since July 2020, home buyers in England and Northern Ireland have been exempt from paying stamp duty on the first £500,000 of their property. In some cases, this has helped buyers save as much as £15,000 on properties.

The stamp duty suspension has also benefited landlords and second-home buyers, although this group have still had to pay the 3% stamp duty surcharge under the previous rules. Even then, the bands for this have been changed slightly to be more favourable.

Rightmove has estimated that if the extension rumours are true – and it would seem they are pretty nailed-on, given the sources they’ve come from - an extra 300,000 property transactions in England could benefit from the tax saving, based on previous HMRC data.

If these additional 300,000 transactions were to make it through, buyers could save £1.75 billion in total. Meanwhile, based on the current sales that have been agreed in England, 80% would pay no stamp duty if the holiday was extended.

The portal says there are an estimated 628,000 sales still currently in the legal process across the UK, including those that were agreed last year and those that have been agreed so far in 2021. Rightmove believes that 100,000 buyers who agreed a purchase last year are set to lose out if the deadline remains set at March 31.
Elsewhere, Zoopla has predicted that up to 234,000 buyers who have already agreed a sale could be exempt from paying stamp duty should the Chancellor confirm his three-month extension to the scheme in next week’s Budget, equating to a total estimated saving for those buyers of £984 million.

If you require any further information about taxes or any other part of the buy-to-let process, you can get in touch with our expert team today.
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