Family Financial Planning: University Costs (1)

Doctors who will be funding their children’s accommodation costs at university and have an interest in property investment might think of investing in buy-to-let in the child’s university town.   If this is a consideration it is crucial to be aware of recently announced changes to the taxation of buy-to-let investments.  These affect both the cost of investing and the returns so could affect the decision of whether to buy.

Stamp Duty

Since 1 April 2016, a higher rate of Stamp Duty Land Tax (SDLT) has applied when buying an additional property such as a buy-to-let.  The rates are 3% higher than when purchasing a main residence:

House Price

Residential SDLT rates

Additional property SDLT rates

£0 - £125k

0%

3%

£125k - £250k

2%

5%

£250k - £925k

5%

8%

£925k - £1.5m

10%

13%

£1.5m +

12%

15%

SDLT must be factored in when considering the expense of the investment.

Tax Relief on Mortgage Interest

When calculating the income tax due on rental income, landlords can deduct the ongoing costs of their investment from the income received.  These costs currently include mortgage interest payments.  This means landlords get tax relief on their mortgage interest: every £1 of mortgage interest paid reduces their taxable income by £1, saving 20p income tax for a basic rate taxpayer, 40p income tax for a higher rate taxpayer or 45p tax for an additional rate taxpayer.

The government has decided this gives landlords an unfair advantage over homeowner-occupiers, who do not receive mortgage interest relief.  They have announced that this relief will be restricted in future to the basic rate of income tax (20p in every £1 at current rates).  This restriction will be phased in over 4 years, starting from April 2017.

For higher rate and additional rate taxpayers who purchase a buy-to-let property with a mortgage, this means the investment will be less lucrative than under the current rules.

Wear and Tear Allowance

Landlords of furnished properties can also deduct the cost of wear and tear when calculating their taxable income.  Previously they could deduct 10% of the rent received as a ‘wear and tear allowance’, regardless of the amount actually spent.  However, the rules have now changed and since April 2016 landlords can only deduct the costs they actually incur due to wear and tear.

Whether you are considering a buy to let investment or want to explore other options for supporting your child at university, we can help.  Please contact Richard Higgs, Chartered Financial Planner, on 0117 966 5699 or richard.higgs@wealthwestmedical.co.uk.  We can also refer you to our mortgage broker if required.

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