When purchasing a buy to let property in Edinburgh there are tax considerations for investors to keep in mind. While we’re not accountants (PLEASE DO speak to a qualified accountant for advice on your tax affairs!) here’s a brief explanation of how the rest tax changes affect buy to let landlords.
Tax on rental income
Income tax is payable on all rent received after deduction of allowable expenses. These allowable expenses previously included; repairs, letting agents letting fees, factoring fees, mortgage interest and an allowance for furnishings however recently some changes were announced in relation to the final two of these allowable deductions.
Mortgage interest
From their 2017-18 tax return (submitted on or before 31st Jan 2018) the amount of income tax relief landlords could claim for the ‘expense’ of mortgage interest reduced. From 2020/21 landlords will no longer be able to deduct finance costs from their property income. Instead they will receive a basic rate reduction from their tax bill. To help ease the pain for buy to let landlords the government is phasing this in over 4 years between 2017 and 2020;
- 2017/18 – deduction restricted to 75% of finance costs (remaining 25% at basic rate)
- 2018/19 – deduction restricted to 50% (remaining 50% at basic rate)
- 2019/20 – deduction restricted to 75% (remaining 75% at basic rate)
- 2020/21 – no deduction. Basic rate tax reduction on full amount
This also applies to finance costs related to loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans.
Replacement of furnishings
A new relief has been introduced which will allow buy to let landlords to deduct furnishing/appliance (including white goods)/kitchenware costs for their rental properties (including partly and unfurnished properties). If an item is improved the cost will be restricted to a like-for-like replacement. As part of this relief, the 10% ‘wear and tear’ allowance was abolished.
Capital Gains Tax
Capital Gains Tax is a tax on sale that buy to let landlords must take into account when assessing their investment strategy. The tax is charged on disposal proceeds, less the original cost of the property, legal costs and capital expenditure on the property. Individuals receive an annual exemption and thereafter Capital gains are taxed on buy to let properties at either 18% or 28% or a combination of the two.
If you are a buy to let landlord in Edinburgh and are looking for tax advice please contact us and we’ll put you in touch with a qualified accountant who will give you advice specific to you own personal situation.