UK Land Tax Rules (latest changes)

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The UK real estate market, especially that of London has, for decades, been a magnate to foreign investors. It is rightly seen as both a safe haven, as well as an income producing and capital appreciating asset class. According to the Nationwide (one of the largest UK mortgage lenders), UK real property has appreciated by an average of 10% per annum, in real terms, since 1960. This, together with stable political conditions, a fair legal system, English as the dominant global language, and, for the Muslim/Arab investor, the availability of competitive shari’a compliant financing mechanisms, has, naturally, resulted in many benefits to both the UK economy and of course for the overseas investor.

However, this success has not been without its side effects, one of which is the squeezing out of first time home buyers from the market, comprised mainly of the indigenous population. This large sector of society is finding it increasingly difficult to raise adequate deposits and mortgages on the ever rising property markets, especially those of London and the South East. This has resulted in politicians in recent years taking measures to redress the balance so as not to lose this important voter block.

The most recent set of regulations aimed at assisting firs time buyers is due to come into force on 1st April 2016. Two important rules will be take effect from that date:

  1. Stamp Duty Land Tax:
    Investors in rental residential properties as well as second homes (sometime referred to as holiday homes) will be subjected to paying an additional 3% on the value of the property over and above the normal rate of tax. So, for example while a £1million property would attract SDLT £43,750 of on 31st March, it will, 24 hours later accumulate total SDLT of £73,750, a 60% overnight increase.
  2. Income Tax
    From April, owners are no longer able to deduct mortgage interest payments from their rental income before they reach a taxable income. Instead, landlords will owe tax at their personal rate on the entire income from their property, with most handed a 20% flat rate of relief that will, in most cases, half they are able to deduct at present

Higher tax paying landlords are set to be worst hit. While those paying the 20% rate as standard will see little change in their tax bill for buy-to-let, those paying 45 per cent income tax will see their tax bill rise from an average of £450 to £2,700 on rental investments.

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Disclaimer
It is not the aim of this blog to survey all land tax related issues, nor is it intended to provide a comprehensive advice on property investment in the UK. Rather it is provided as a short broad guide to the latest and most relevant land tax rule changes to residential property investments. Readers are encouraged to seek independent legal and taxation advice before embarking on any investment in real estate or any other asset class.