This article was updated on 1 April 2021.
There are a number of new buy-to-let tax changes landlords should be aware of in 2021.
From the tax relief you can claim on buy-to-let, to regulation changes outside of tax, here’s a run-down of what’s been announced – and what to watch out for this year.
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Not a new one exactly, but 2021 is the first full year where you can’t deduct mortgage expenses from rental income. Instead, landlords get a 20 per cent tax credit on interest payments.
Landlords used to be able to offset mortgage interest payments against rental income, but in 2015 the government announced they’re phasing this out.
In 2017-18 the tax relief you could claim reduced to 75 per cent. Then in 2019-20 it was only 25 per cent. Now it’s gone completely.
The government has replaced this with a 20 per cent tax credit, which isn’t as beneficial for higher-rate and additional-rate taxpayers.
To help mitigate the new rules, more and more landlords are setting up a limited company when buying a new rental property. This is because you’ll be subject to Corporation Tax rates of 19 per cent, rather than the higher individual income tax rates.
Research from estate agent Hamptons shows that a record 41,700 new buy-to-let limited companies were formed in 2020 – that’s an increase of 23 per cent from 2019.
The government increased the Capital Gains Tax allowance for 2020-21. It went from £12,000 to £12,300.
So if you’re selling a second property you get to earn more tax-free. But the Capital Gains Tax rate is higher for landlords – 18 per cent for basic-rate taxpayers, and 28 per cent for higher and additional-rate taxpayers.
These rates may change when we enter a new tax year in April, so keep an eye out for announcements and we’ll keep this page updated.
Following a review of the system, a freeze on Capital Gains Tax could mean landlords are faced with a higher tax burden when you come to sell a property.
The Office for Tax Simplification had previously recommended an overhaul of Capital Gains Tax on property, which includes reducing the capital gains tax-free allowance and increasing Capital Gains Tax to be more in line with income tax rates.
While this hasn't materialised yet, it could be something to keep an eye on after we emerge from the pandemic.
This is the first full year Private Residence Relief has been restricted since rules changed in April 2020.
Previously, if you lived in your property before letting it to tenants, you’d get Private Residence Relief when you came to sell. This meant you wouldn’t pay any Capital Gains Tax for the time you lived in the property, plus an extra 18 months after you moved out. But under the new rules this has reduced to nine months.
What’s more, the £40,000 of lettings relief (which you can claim if you rent out a property that’s been your main home) will only apply to landlords who share an occupancy with their tenants.
So what exactly are the individual income tax rates and bands for 2020-21? Your personal allowance is the amount you can earn before you start paying income tax. Currently this is £12,500 – no increase from last year.
The higher rate threshold for rental income increased last year to £50,000, which is the point at which you start paying the higher rate of tax (40 per cent) on your profits. The additional rate (45 per cent) threshold remains unchanged at £150,000.
To help the country recover from the economic cost of Covid-19, the government had been considering a one-off ‘wealth tax’ instead of increasing income tax or VAT.
And earlier this year the Wealth Tax Commission had proposed an additional one per cent tax for those with assets over £500,000, or £1 million for married couples. Debts such as mortgages on a property won’t be deductible though.
However these proposals didn't materialise in the Spring Budget, but could be revisited again in the future.
The stamp duty holiday was due to end on 30 March, but has been extended until 30 June.
This will then taper off, applying to the first £250,000 until end of September.
Since July 2020, home buyers in England and Northern Ireland haven’t had to pay stamp duty on the first £500,000 of their property – this has helped buyers save as much as £15,000 on properties at the top of the threshold.
Landlords and second-home buyers have also benefited from this suspension, but have still had to pay the three per cent investor stamp duty surcharge under previous rules.
What's more, new figures from HMRC give a healthy picture of the housing market, with a 48.5 per cent increase in residential transactions in February 2021 compared with the previous year.
Outside of tax changes there are more updates to regulations that landlords should know about for 2021:
Are you affected by the buy-to-let tax rules in 2021? Let us know in the comments below.
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