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7 new buy-to-let tax rules landlords should know about for 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.

New tax rules on buy-to-let tax properties: explained

1. Tax relief on buy-to-let mortgages

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.

2. What are tax rates for buy-to-let in 2021?

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.

3. Changes to Capital Gains Tax on buy-to-let

The Capital Gains Tax system is currently under review, so there may be some changes to look out for later this year.

The Office for Tax Simplification has 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 nothing has been announced just yet, this could make selling your investment property more expensive in the future.

4. Private Residence Relief is restricted

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.

5. Buy-to-let income tax rates 2021

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.

6. One-off wealth tax proposals

To help the country recover from the economic cost of Covid-19, the government is considering a one-off ‘wealth tax’ instead of increasing income tax or VAT this year.

The Wealth Tax Commission has 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.

7. Stamp duty holiday ending

The stamp duty holiday is due to end on 31 March.

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.

There have been calls to extend this tax break by a further six months to continue supporting the property market during the pandemic – and MPs are scheduled to debate this in parliament on 1 February.

That said, new figures from HMRC give a healthy picture of the current housing market, with a 31.5 per cent increase in residential transactions in December 2020 compared with the previous year. House prices were up 7.5 per cent in the year up to November 2020. 

This might make any chance of extending the stamp duty holiday unlikely, but keep an eye out for any updates if you’re planning on buying another property this year.

What about other buy-to-let regulation changes?

Outside of tax changes there are more updates to regulations that landlords should know about for 2021:

Source: Catriona Smith, Simply Business