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The buy-to-let property market

Esme Shakeshaft

The buy-to-let market has been dominated by investors seeking a property pension, according to new research.

Sequre Property Investments reported that 46% are feeling obliged to pour cash into their properties, due to an increasingly poor return from pensions and equity investments.

Recent tax changes and stamp duty increases, has left a lot of potential investors on the fence, asking ‘is it really worth it?’

Extra stamp duty
Since 1 April 2016, anyone buying a second or subsequent UK residential property has been subject to a 3% stamp duty land tax (SDLT) surcharge, thus in turn can add a substantial cost to a buy–to-let property purchase. If an investor is looking at a £200,000 property, they can expect to pay stamp duty of £6,000.

Landlords: restriction on finance costs
Those that are currently residential landlords are able to claim various costs when it comes to financing your buy–to-let property, as expenses against rental income. This includes:
  • Interest in service debt used to fund the rental business
  • Incidental costs of obtaining or repaying finance
When is income tax relief available?
Income tax relief is available at the marginal rate of 20%, 40%, or 45%. This can in some cases, produce a rental loss for the tax year, which can be carried forward and offset against further rental profits, from the same property business.

In April 2017 this will change. If you are subject to income tax, a restriction will be applied for the relief you receive on the finance costs of running your rental business. This will apply to interest paid on any debt. Both partnerships and trustees are included, although there is exclusion for non UK resident companies, subject to UK income tax and for furnished holiday lets.

This restriction will remove finance costs from the tax calculation and introduce a basic rate tax credit, which is equal to 20% of the related finance costs. To make it even more complicated the tax credit will also be restricted in circumstances where the property profits are less than the finance costs, this will ensure that the finance tax credit is not given against tax on other sources of income. If the finance tax credit is restricted, the excess can then be carried forward and used in other tax years.