2021 Buy to Let Tax Rule Changes Landlords Need to Know
Do you own – or are you considering investing in – a buy to let property?
In 2021, there are several new buy-to-let tax changes that landlords should be aware of. Some of them are minor, while others may have you rethinking your plans, especially if you haven’t made an investment yet.
Here’s a rundown of what’s been announced – and what to look out for this year – from buy-to-let tax relief to regulatory changes outside of tax.
Buy to Let Mortgages and Tax Relief
Not exactly new, but 2021 is the first full year in which you won’t be able to deduct mortgage interest from rental income. Landlords, will instead get a 20% tax credit on mortgage interest payments.
Landlords used to be able to deduct mortgage interest payments from rental income, but the government announced in 2015 that this would be phased out.
In 2017-18, the amount of tax relief you can claim was reduced to 75%. Then it dropped to only 25% in 2019-20. It’s completely vanished now.
This has been replaced by a 20% tax credit, which isn’t as beneficial for higher-rate and additional-rate taxpayers.
To help mitigate the effect of the new rules, an increasing number of landlords are forming a limited liability company (LLC) when purchasing a new rental property. This is because, rather than the higher individual income tax rates, you will be subject to Corporation Tax rates of 19%.
According to research from estate agent Hamptons, a total of 41,700 new buy-to-let limited companies were formed in 2020, up 23% from 2019. So, should you decide to do so, you’ll be far from alone!
Buy to Let Tax Rates in 2021
For 2020-21, the government increased the capital gains tax exemption. It increased in value from £12,000 to £12,300.
As a result, if you sell a second property, you can earn more money tax-free. However, landlords pay a higher capital gains tax rate: 18% for basic-rate taxpayers and 28% for higher and additional-rate taxpayers.
Capital Gains Tax and Buy to Let Properties
Following a review of the system, a Capital Gains Tax freeze could result in a higher tax burden for landlords when it comes time to sell a property.
The Office for Tax Simplification had previously recommended that the Capital Gains Tax on property be overhauled, which would include lowering the capital gains tax-free allowance and raising capital gains tax to match income tax rates.
While this hasn’t happened yet, it’s something to keep an eye on once the pandemic chaos has passed.
Restricted Private Residence Relief
Since the rules changed in April 2020, this (2021) is the first full year that Private Residence Relief has been restricted.
Private Residence Relief was previously available if you lived in your property before renting it out to tenants. This meant you wouldn’t have to pay any Capital Gains Tax for the time you lived there, plus an additional 18 months after you left. However, under the new rules, this time limit has been reduced to nine months.
Furthermore, the £40,000 lettings relief (which you can get if you rent out a home that was previously your primary residence) will only apply to landlords who share an occupancy with their tenants.
2021 Buy to Let Income Tax Rates
So, what are the rates and bands for individual income tax in 2020-21? The amount you can earn before you have to pay income tax is known as your personal allowance. This is currently £12,500, which is the same as last year.
Last year, the higher rate threshold for rental income was raised to £50,000, at which point you begin paying the higher rate of tax (40%) on your profits. The threshold for the additional rate (45%) remains at £150,000.
The End of the Stamp Duty Holiday
The stamp duty holiday was supposed to end on March 30th, but it was extended until June 30th, 2021.
This will then taper off until the end of September, only applying to the first £250,000.
Home buyers in England and Northern Ireland haven’t had to pay stamp duty on the first £500,000 of their property since July 2020, saving them up to £15,000 on properties at the top end of the threshold.
Landlords and second-home buyers benefited from the suspension as well, but they still had to pay the 3% investor stamp duty surcharge under the old rules.
Furthermore, new HMRC data shows that the housing market is doing well, with a 48.5 percent increase in residential transactions in February 2021 compared to the previous year.
Keep in mind that these rules change often. There are a number of proposals on hold that may affect the buy to let property niche, but as COVID-19 recedes you can expect that they will be revisited and implemented over the next year. That’s why however many buy to let properties you own, it will pay to have an accountant on your side, who can keep up with these changes for you.
It’s just as important to consult with one before you invest in a buy to let, as in addition to helping make sure you get the financial side of things right we can also help you ensure you are getting the most from your property. For example, those buying in an area that could be considered a holiday spot may want to consider a holiday let set up instead, which can, in some cases, be more beneficial from a tax and finances point of view.
Want to learn more? Contact us today.