Multiple home ownership: beware of the tax changes
Significant changes to the rules on property tax relief are currently being phased in, which may have implications for those looking to rent out or purchase additional properties.
With new figures suggesting that multiple property ownership has risen significantly, we examine the recent tax changes and how they could affect you.
According to new research published by the Resolution Foundation, as many as 5.2 million individuals in the UK now own more than one property. The think-tank found that the number of multiple home owners rose by 30% between 2002 and 2014.
However, recent years have also seen the government introduce a number of measures to target second home owners. This includes charging higher rates of Stamp Duty Land Tax (SDLT) for buyers of second homes in England, Wales and Northern Ireland. The higher rates are three percentage points above the current SDLT rates. A similar 3% supplement applies in Scotland, where property transactions are governed by the Land and Buildings Transaction Tax (LBTT).
In addition, beginning from April 2017, finance costs relief for individual landlords is being restricted to the basic rate of income tax. The change is being implemented gradually, over a period of four years.
Finance costs include mortgage interest, interest on loans to purchase furnishings and fees incurred when withdrawing or repaying mortgages or loans. Affected landlords will no longer be able to deduct finance costs from their property income in order to arrive at their property profits. A basic rate reduction from their income tax liability will instead be made to them for their finance costs.
For 2017/18, the deduction from property income is restricted to 75% of finance costs, with the remaining 25% available as a basic rate tax reduction. Over the next three years, the direct deduction of finance costs will reduce each year by 25% until 6 April 2020. At this time, all finance costs incurred by a landlord will be given as a basic rate tax deduction.
Avoiding the pitfalls
With the government seeking to clampdown on second home ownership, it is important to ensure that you are aware of the tax obligations of owning more than one property.
HMRC recently outlined a range of tax errors commonly made by multiple home owners. It found that many individuals fail to declare rental profits to HMRC because they do not consider themselves to be a landlord for tax purposes. For example, this might be as a result of inheriting a property, or moving in with someone and neglecting to check whether there are any tax implications to renting out the vacant property.
HMRC's Let Property Campaign allows those letting residential property in the UK or abroad to bring their tax affairs up-to-date, and to secure the ‘best possible terms' to pay the tax they owe. For more information on the campaign, visit https://letproperty.campaign.gov.uk/.
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