The best possible return on an investment is surely the ultimate goal for anyone looking at alternative options to significantly boost their earnings and take a step closer to sitting pretty in retirement.
With so many options on the table and the requirement to navigate a seemingly endless avalanche of change relating to tax, how can individuals ever feel secure that they will reap the benefits of their investment decisions in years to come?
The pensions verses property investment conundrum is high on the agenda for individuals looking to the future, eager to ensure the best possible financial security in retirement. Up until the budget announcements in the 2015 Autumn Statement, investing in a buy-to let property seemed to be a pretty good bet, but changes to stamp duty and Land tax (SDLT) along with impending changes to taxation of second properties put a large question mark over expected returns.
But buy-to-let (BTL) investing is subject to several taxes, whether you own a single property or 100. There are four taxes that your investment in a by-to-let property will possibly incur - Stamp Duty (SDLT), Income Tax, Capital Gains Tax (CGT) and Inheritance Tax (IHT). The first major change which comes into effect on April 1st will see a straight forward percentage increase to stamp duty payments. The current threshold for stamp duty payments is £125,000. The changes will mean that all properties purchased will incur stamp duty. The existing percentage stamp duty charge along with the percentage increase for each band is illustrated in the chart below
Stamp duty and Land tax increases form April 1st
On top of the increases in stamp duty and Land tax increases (SDLT) a more complex change to income tax on buy to let properties will be phased in over a 4 year period from 2017-2020, delivering the biggest blow to land lords of second properties. This change is expected to make it incredibly difficult for them to see a decent return, if at all, on second property investments.
Currently land lords of second properties can claim all of the annual mortgage interest they pay against their income from a property, and they only pay tax on the difference. The rule changes which are to be phased in from 2017 will mean that when the new restrictions are fully in force from the beginning of the 2020/21 tax year, landlords will be only be able to claim tax relief at the basic tax rate of 20%, instead of 40% or 45% for those in higher or top rate income tax brackets respectively.
That’s not all that may be changing. The Chancellor has proposed that, from April 2016, you’ll only be able to claim for ‘wear and tear’ costs actually incurred on replacing furnishings when calculating taxable profits. You’ll do so by providing itemised receipts that show the replacement goods you’ve purchased or repairs you’ve carried out. Currently, you’re given an allowance regardless of your actual expenditure.
The proposed changes have been heavily criticised for their complexity, as well as being described as ‘catastrophic for the private rented sector’. Cherie Blair, QC was recently named as the first to launch a legal battle against these proposed changes, using European human rights legislation in an attempt overturn them.
Should these proposed changes go ahead as planned, it is clear that the higher rate tax payer will see their profit margins squeezed substantially and there will be a large question mark over whether it is viable for these individuals to remain invested in buy-to-let. Basic-rate taxpayers will also need to analyse the complex changes carefully, because the changes could easily push them into the higher-rate tax bracket, taking their tax payments up to 40%, proving that no-one invested in property is safe from the tax raid on buy-to-let.