New buy-to-let tax rules Investors need to know about in 2021.

Posted on February 3rd, 2021.

With the Spring Budget due on March 3rd and the new financial year starting in April, there are 7 buy-to-let tax changes Investors need to be aware of in 2021. From tax relief on Buy-To-Let to Capital Gains Tax, here is a run-down of the announcements and what to look out for in 2021.

1. Tax relief on buy-to-let mortgages

The changes were first introduced back in 2017 and have been phased in gradually, though 2021 is the first full year mortgage costs cannot be off set against rental income. Instead, Investors will get a 20% tax credit that is not as beneficial for higher and additional rate payers.

To mitigate the liability, Investors have formed Limited companies. Research from Hamptons Estate Agents shows that Buy-To-Let Investors formed 41, 654 new limited companies in 2020 an increase of 23% compared with 2019.

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

The Government changed Capital Gains Tax allowance 2020/21 from £12000 to £12300. Despite the increased allowance, Capital Gains Tax is higher for Investors in 2021, 18% for lower rate payers and 28% for higher and additional rate payers. *These rates may be subject to change, though we are awaiting announcements and will keep you posted.

3. Changes to Capital Gains Tax

Capital Gains Tax is under currently under review. The Office for Tax Simplification has put in proposals for changes. In essence the proposal is to reduce the current allowance and increase the levy so that its in line income tax levels. Nothing official has been announced, though if phased in , it will make selling your investment more expensive in the future. 

4. Restriction on Private Residence Relief

The rules changed in April 2020; this will be the first full year the changes will take effect. This is what’s changed: If you lived in the property before letting out to tenants , you qualified for Private Residence Relief when you came to sell. This gave you an exemption for Capital Gains for the time you lived there and for a further 18months after having moved out.

Under the new rules the 18-month period after moving out has been cut to just 9 months. The relief that could be claimed was up to £40,000, this concession has now been removed and only applicable to owners who shared occupancy with their tenants- or a live-in Landlord.

5.Tax rates for Buy-To-Let in 2021

  1. The personal allowance is the amount you can earn before you start paying income tax. This stands at £12 500 per year – no change from last year.
  2. Higher rate threshold was increased in 2020, now at £50,000 per year- The tax rate is 40% on all profits.
  3. The additional rate threshold remains unchanged at £150,000 per year – The tax rate is 45% on all profits. 

6. The One-Off Wealth Tax

The Covid-19 Pandemic has seen Government borrowing to the tune of around £290 billion (and counting). As unpalatable as it may seem in this climate, the Government is considering a one-off wealth tax, this would be an alternative to raising VAT and income tax.

A group of tax experts and academics called The Wealth Tax Commission have been assigned to analyse proposals for a UK wealth tax. They propose a 1 % tax for individuals with assets of over £500,000 and over £1 million for married couples. Other proposals include taxing world-wide assets and trusts both on-shore and off-shore.

7. End of the Stamp Duty Holiday

The Stamp Duty holiday is due to end on March 31st. It’s a hot topic in the property press, e-petitions have been issued by Industry regulators as well as the lobbying of MP’s in a bid to have it extended. Introduced in July 2020 , UK and Northern Ireland home buyers are exempt from any Stamp Duty on their purchase up to the first £500,000- this has helped buyers save as much as £15,000 at the top of the threshold.

For Investors and second homeowners , they have only been liable for a 3 % surcharge. According to HMRC, the statistics show transactions up by 31.5% at the end of 2020 compared to 2019 and a rise of 7% in UK average house prices for the same period. No official announcement has been made, the chances of an extension are unlikely, though keep an eye out for any changes if considering further property investment this year.