The start of the new tax year brings changes to mortgage interest tax relief and capital gains tax for buy-to-let landlords.
Landlords face more taxation changes from April 6 2020, with the phasing out of mortgage interest tax relief reaching its final stage and capital gains tax adjustments.
The start of the new tax year has seen mortgage interest tax relief scaled back further, while landlords who sell a property also now have less time in which to pay capital gains tax.
People who previously lived in a property that they later rented out have also seen tweaks made to the tax reliefs they can claim.
The changes to mortgage interest tax relief, which were well flagged in advance, have been blamed for many landlords exiting the sector in the past couple of years.
These are the main changes landlords need to know about:
Mortgage interest tax relief
The government has been in the process of tapering down mortgage interest tax relief since 2017 and gradually replacing it with a new system.
Before April 2017, landlords could claim mortgage interest tax relief on 100% of their mortgage interest costs. The amount they could claim was gradually reduced to 25% last year.
But under the new system, which comes into force on 6 April 2020, the relief has been phased out completely and replaced with a 20% tax credit for mortgage interest.
Changes to mortgage interest tax relief will affect around 55% of landlords who have one or more buy-to-let mortgages.
However, industry bodies have said the changes have caused some landlords to stop expanding their portfolios or even sell some of their properties.
Capital gains tax payments
Capital gains tax is paid on the profit people make when they sell a property that is not their primary residence.
The tax is charged at a rate of up to 28% on the difference between the property’s purchase price and its sale price, after deduction of the personal allowance. This personal allowance is £12,300 in the 2020-2021 tax year.
Landlords have previously had to declare capital gains tax liabilities in their annual tax return, giving them more than a year in which to settle the bill.
But from April 6 2020, they will need to declare and pay the tax within 30 days of selling a property.
Capital gains tax relief reduction
The changes to capital gains tax do not end there, with changes also made to capital gains tax relief for landlords who previously lived in their investment property.
Under private residence relief, landlords could exclude the years in which they lived in their property when calculating their capital gains tax liabilities.
They also did not need to include the final 18 months for which they owned the property in the calculation, even if they did not live there during this period.
But under the new rules, this 18-month period has been halved to nine months, increasing landlords’ capital gains tax liabilities.
Rules around letting relief have also been tweaked. Previously, landlords were able to claim capital gains tax relief of up to £40,000, rising to £80,000 if the property was jointly owned by a couple, when they sold an investment property that was previously their home – even if they had not lived in it for many years.
But from April 6 2020 landlords will need to be living in the property themselves when they sell it to claim this benefit. This effectively removes the relief for the majority of landlords.
Top 3 takeaways
1. Mortgage interest tax relief has been phased out and replaced with a 20% tax credit for mortgage interest
2. Landlords now need to declare and pay capital gains tax within 30 days of selling a property
3. Capital gains tax relief for landlords who previously lived in their investment property has also been scaled back.