Concrete Analysis | New UK tax measures will target rental profits, putting the brakes on the ‘buy to let’ market

United Kingdom tax legislation is becoming ever more complex. Property ownership as an investment has been the focus of several recent legislative changes in an effort to cool the housing market, and most of these are designed to discourage buy-to-let investment. For landlords living outside the UK, such as in Hong Kong, the new measures mean they could likely owe more tax on their rental profits.

A restriction on the relief for mortgage interest and other finance costs against rental income is being phased in from April. In 2017 to 2018, only 75 per cent of such costs will be permitted as a deduction against the rents received and this will be reduced by 25 per cent each subsequent year.

The remaining unrelieved finance costs will be given limited relief by way of a credit against a person’s tax liability at 20 per cent of the costs. By 2020 to 2021, relief will only be given by way of the credit, known as a “tax reducer”. This will slash the relief obtained by higher rate tax payers resulting in quite material increases in their tax liabilities, and potentially, the net cash flows becoming negative.

At present, companies that let property can continue to offset finance costs in full.

The “Wear and Tear” allowance for furnished rental properties was abolished on April 6, 2016. This relief provided a notional tax deduction at roughly 10 per cent of the gross rents received to attempt to reflect the ongoing average cost of continually furnishing a property. In its place, individuals are now entitled to tax relief on the cost of replacing furniture, which in most cases is likely to be less generous.

Since April 2016, when acquiring a new rental property or second home, a 3 per cent surcharge on the Stamp Duty Land Tax (SDLT) rate payable is applied. Unfortunately, there is limited relief from this and there are a host of pitfalls. For example, if you buy a new home but have not managed to sell your original home by that time, you suffer the higher rate. You can claim back if you sell the original home within 36 months – but this is a cash flow pinch at a time when you may be able to least afford it.