Buy-to-let Tax Rules 2019: Everything You Need to Know

Mortgage interest tax relief

The most significant tax rule change in 2019 was actually announced some four years ago, and its impact continues to be widely felt.

Anyone who has been involved in property for more than a few years will know that prior to April 2017, landlords were able to deduct the interest paid on their mortgage from their rental income, which consequently left them with a lower overall tax bill.

However, one of George Osborne’s most significant legacies as Chancellor was to announce that he was bringing this tax relief to an end, leaving some buy-to-let investors fearing for the worst.

Although the tax relief has been phased out over a number of years, it now means that for the 2019/20 tax year, only 25 per cent of interest paid on your mortgage can be deducted from rental income.

In April 2020, this amount will be cut to zero, meaning you won’t be able to deduct any of your mortgage expenses from your tax bill.

The Government has instead introduced a 20 per cent tax credit which from April 2019 can be applied to 75 per cent of your mortgage interest, increasing to 100 per cent of your mortgage interest from 2020.

Confused? The following example may make it clearer:

In April 2019 a landlord gets £15,000 in rent a year

He also pays £10,800 in mortgage interest payments

25 per cent of the mortgage interest can be deducted from rental income (25 per cent of £10,800 is £2,700). This means £15,000 – £2,700, leaving £12,300 on which 20 per cent basic rate tax is payable.

The new 20 per cent tax credit relief can be applied to 75 per cent of the mortgage interest. 75 per cent of £10,800 is £8,100 – 20 per cent of this is £1,620 – so £1,620 is the tax credit relief.

The government has outlined further examples of how you may be affected here, but the hardest hit will continue to be those higher or additional rate taxpayers.

Personal tax allowance increase

In the 2019/20 tax year, the amount of income you can earn before being taxed has risen from £11,800 to £12,500, while the threshold for the higher rate bracket has risen to £50,000.

Stamp duty surcharge

Stamp duty may not be a popular topic but it doesn’t look like it’s going anywhere fast, although potential changes have recently been mooted.

The stamp duty surcharge on buy-to-let properties means it’s even more important to budget these costs into your planning at an early stage.

In 2019, stamp duty on any buy-to-let property remains at three per cent above the standard rate – so if a house costs between £250,001 and £925,000 it would be a five per cent duty for a standard buyer, with a jump to eight per cent if it is buy-to-let property.

It’s worth noting that if you move out of your main home without selling it, you will be eligible to pay this extra three percent stamp duty on purchase of a second home. If, however, you sell the original property within 36 months, you will be able to claim a refund on the money paid.

Capital gains tax allowance

If you are thinking about selling a buy-to-let property, the latest rules around capital gains tax are something you will need to carefully consider.

How much you have to pay is dependent on your particular circumstances, and the government’s capital gains tax guide is a useful tool to help you assess your own situation.

One of the more significant changes to buy-to-let tax rules this year is the increase in capital gains tax allowance, meaning you should be able to earn more profit tax free.

In 2019/20, the allowance has risen from £11,700 to £12,000, with the amount above this taxed at 18 per cent for basic-rate payers and 28 per cent for higher rate payers.

At the moment, you can let a property out for 18 months after moving out, before paying capital gains tax on a sale.

For example: –

You live in your house for six years then let it out for six years.

You get Private Residence Relief for the time you lived there, plus the last 18 months you owned the property, even though you were not living in it.

So if you make a gain of £120,000 when you sell the property, you get private residence relief for six years plus 18 months – a total of 7.5 of the years.

This is 62.5 per cent of the total time you owned the property.

You get Private Residence Relief on the same proportion of your gain – 62.5 per cent of £120,000 is £75,000. You would therefore not pay tax on this amount, only on the remaining £45,000.

You may also benefit from up to £40,000 in lettings relief to reduce the bill.

However, further changes appear to be on the horizon, so it’s worth keeping an eye out for future announcements from the Treasury.

The government are currently considering an amendment which would cut this timeframe from 18 months down to nine, and making lettings relief applicable only to those landlords while live with their tenant.

Other costs

While not strictly tax-related, it’s also worth checking you’re up to date with the latest regulations elsewhere, such as the new ban on charging tenants fees in relation to lettings, which came into force this June.

Similarly, don’t forget to keep track of any replacement items you buy or work that is done on your buy-to-let properties, as you may find these are eligible for tax relief.

For example, if you replace old carpets at a cost of £200 and a bed for £400, this can be deducted from your annual rental income to work out your tax bill at the end of the year.

Make sure you keep a copy of all receipts – even if you aren’t clear what is covered, as this can make a significant difference at the end of the financial year.