Many of our landlords have been discussing with us the impact of the recently announced changes to mortgage tax relief and the second home supplement.
Second Supplement
In December the Scottish Government announced a (LBTT) Land and Building Transaction Tax ‘second-homes’ supplement on purchases of additional residential properties, including buy-to-let properties. This will come into force from April 2016. The LBTT supplement is 3% of the total price of the property for all transactions above £40.000.
Therefore a buyer of a second property will have to pay LBTT charges plus an additional 3% levy. For example if you were looking to purchase a property at £150,000 – under the current rates you would pay LBTT of £100 but from April, this figure would increase to £4,600 (£100 LBTT plus £4,500 second homes supplement).
The definition of what is deemed to be a main residence or second (and additional) home is still to be fully defined but the purchase of a single buy-to-let property will certainly incur this supplement.
In recent months there has been an increase in sales activity as sellers and buyers try to complete before the changes take effect in April. This increase in demand has further pushed up property prices. All the expert media opinion expects the increased purchase tax to be passed onto tenants through higher rental prices in the longer term.
Mortgage Relief
The Chancellor announced a surprising change to mortgage tax relief in the 2015 emergency budget. The change removes a landlord’s ability to deduct mortgage relief from their rental income. In other words interest on a mortgage is no longer seen as a cost. Landlords will instead receive a basic rate reduction from their income tax liability for their finance costs.
Starting in April 2017 the new tax rule will be introduced on a sliding scale until 2020 when mortgage interest relief will be removed altogether. We have found the following article very useful in simplifying what can be a complicated subject –
http://www.propertygeek.net/budget-2015-mortgage-interest-relief-changes-explained/
The change does not apply to properties that meet all the criteria to be a furnished holiday letting. HMRC’s definition of a furnished holiday let is very specific –