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Changes to Buy to Let Mortgage Tax Coming In April 2017

In the 2015 Budget, former Chancellor, George Osborne announced that tax relief available to private landlords would be severely curtailed.

Tighter restrictions were also imposed on the wear and tear allowance that landlords currently enjoy.  Suddenly, extensive property portfolios do not look so shiny for some landlords, who may have to pay tax on turnover, rather than the difference between rental income and mortgage interest.

Buy-to-Let tax relief changes – the basic principles

The buy-to-let tax relief changes are set to be phased in from 6th April 2017.  At present, the interest payments made on a buy-to-let mortgage are a valid tax deductible expense, which means landlords only pay tax on profits.  This is in keeping with business tax in general (expenses are deducted before tax is calculated).

However, over four years, from April 2017, mortgage interest tax relief will gradually be cut back to 20%. 

The percentage of interest from buy-to-let mortgages subject to the changes will be phased as follows:

  • 2017/18 – 25%
  • 2018/19 – 50%
  • 2019/20 – 75%
  • 2020 onwards – 100%

Because landlords pay tax on their profits according to their tax band, those who are in the 40% or 45% could face significant increases in their tax bills.If you’re a higher-rate taxpayer and your interest is 75% or more of your rental income, you will effectively receive no return on your investment.

Who will suffer most? 

Because tax relief will be at a flat rate of 20%, landlords who only have one or two small properties and do not earn over the higher-rate tax bracket, and those who are mortgage-free will not be affected.  It is the landlords who have borrowed heavily, therefore incurring large interest payments, who will be hardest hit initially.  However, if interest rates rise, as one-day they inevitably will, even those who have borrowed conservatively could find that their property portfolio costs them more than it returns, forcing them to sell.

Ways to avoid the buy-to-let tax relief changes

Charging higher rents is probably not the answer, as many tenants are already paying the maximum market rate.

Instead, consider the following:

  • Switch your mortgage to a lower rate of interest (although you must balance this against the higher risk that such loans carry).
  • Transfer some of your portfolio into your spouse’s name if he or she pays a lower rate of tax than you do.  You must watch out for capital gains tax and that you do not lift your spouse into the higher tax bracket using this strategy.
  • Limited companies are not affected by the change, so you could set up a company and transfer your properties into it.  Any transfer will be classed as a sale so you may need to pay capital gains tax.

In Summary

If you are a landlord, you may wish to consider restructuring your property portfolio to avoid dramatic increases in tax payments over the coming years. If you plan to do this, it is crucial that you seek professional advice to ensure you are not hit hard by capital gains tax payments.

At Bird & Co, our conveyancing solicitors are property experts. We have years of experience helping clients manage their buy-to-let portfolios, with customer service at the heart of what we do. If you need advice on the coming changes to buy-to-let taxation, you need the experts at your side. Get in touch with us today on 01636 600 656.