Buy to let landlords worried about the impact tax changes will have on their property businesses have won some respite from Chancellor Philip Hammond.
Despite protests and legal challenges aimed at stirring up hype, the real tax situation is a lot less threatening than many would have landlords believe.
In his Autumn Statement 2016, Hammond promised to keep two of former Chancellor George Osborne’s policy decisions:
- To raise the threshold for paying higher rate tax (40%) to £50,000
- To raise the income tax personal allowance to £12,500
Both these increases will take effect by April 2020 and are expected to life hundreds of thousands of middle wage earners out of higher rate income tax.
What they mean is no landlord will lose their mortgage interest relief until they earn £50,000 a year from April 2020 and by the trigger date, the tax-free allowance will hit £12,500.
The £50,000 threshold is crucial news for landlords.
Any husband and wife team owning rental property can earn up to £100,000 before paying higher rate tax.
The earnings are total income from any source, including salary, rents, dividends and interest on savings.
With HM Revenue and Customs (HMRC) Form 17, landlords can switch shares of ownership between spouses without triggering capital gains tax to make sure both remain basic rate taxpayers (20%).
The rising higher rate tax threshold dovetails with how the government is phasing in mortgage interest relief for 40% taxpayers.
The full relief will start from the same date as the £50,000 threshold.
In pounds and pence, the new threshold means someone earning up to £50,000 a year will pay £7,500 a year in tax.
This tax year, the comparable figure is £9,200 tax paid on an income of £50,000 – leading to an income tax saving of £1,700 a year.
For many landlords, switching property ownership on a Form 17 is a low-cost option compared with some barristers charging up to £14,000 for tax-planning solutions.
A lawyer can cheaply draft the trust document that goes with a Form 17 – costing between £200 and £500 from many solicitors.
Mortgaged property transfers may involve a stamp duty charge.