Mortgage Credit Directive changes: what do they mean from a tax perspective?

Looming tax implications and changes to the buy to let sector have been stirring the market for quite some time now, causing many borrowers to either cut ties or rush to remortgage before the big day comes. Yet with the Mortgage Credit Directive (MCD) equally set to reverberate through the market next month, there are now even more chances to be aware that may affect your personal lending capabilities, as well as applying new tax implications to your bottom line in assessing the actual profitability of a transaction. We know all too well that securing and structuring the right finance for your circumstances is only one part of the equation, and as always, we like our clients to have the complete picture to consider.

With the MCD enforcing itself in March this year, stamp duty changes being applied from April, and now, gradual tax changes coming into force in April 2017, the mortgage market’s diary has undoubtedly been filling up rapidly. So we’ve outlined key upcoming changes, allowing you to make informed decisions for your future property market endeavours:

• Stamp duty changes

George Osborne previously announced in the Autumn Statement, that any homeowner completing on an additional property on or after April 1st 2016 would be required to pay an extra 3% across all stamp duty charges. Although a final policy is yet to be confirmed in the March 2016 budget, this does not only include buy to let investors, but also people buying holiday homes and those who currently own a property abroad (even if they’re buying their first home in the UK). Equally, if you move from your main residence and let to buy, the stamp duty surcharge will be liable on the second property, however, this can be refunded if the original property is sold within 18 months.

• Mortgage interest tax relief

Tax relief on mortgage interest payments is set to be phased out over 4 years from April 2017, affecting higher rate taxpayers, who will only be able to claim back the basic tax rate of 20%. A decision with the intention to tax landlords on their turnover rather than profit, this makes tax potentially payable even on non-existent income (in a worst-case scenario). Designed to create a more level playing field between those buying a home to live in and those buying commercially to let, landlords will no longer be able to deduct the cost of their mortgage interest from their rental income when calculating a profit on which to pay tax. Regardless of your personal top tax rate, higher-rate taxpayers will effectively be paying tax on mortgage interest, in addition to the interest itself.

The silver lining, it appears, is that landlords structured as companies are exempt, and will continue to pay corporation tax on their profits. Buying a buy-to-let property and securing an associated mortgage through a limited company is not a viable option for all, but it is something we can help you explore. It’s easier to get a mortgage with a special purpose vehicle which only holds properties, for example, than a trading company which can carry out other business, as they’re regarded less complicated and easier to underwrite. This can be beneficial for higher taxpayers or basic rate taxpayers who (when the new rules come in) will have combined rental and other income over the £40,000 threshold for higher rate tax.

• Capital gains tax

Capital gains tax which has been written about quite extensively over the past few years, will also be facing changes from 2019. This tax, which is payable when you sell a second home or an investment property (yet not on the main residence), will have a time frame introduced for settling tax payments. The new timeline is 30 days post sale as opposed to the current 21 months.

As ever, the mortgage market and general London property market is buzzing with activity, and we do our best to keep you informed and up to date. The aforementioned tax changes are something to take into consideration when assessing your next move, but either way, there are many opportunities available – whatever your circumstances – of which a broker will be able to advise you on. If you would like more information on any upcoming tax changes, or general market activity, feel free to chat to one of our expert brokers anytime.