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Is this the end of Buy To Let?

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The beginning of the new financial year marked the day that major tax changes affecting Buy-To-Let investors came into force. When the tax changes were originally announced in 2016, landlords expressed concern that it would restrict their ability to turn a profit on their investment. Following on from the rise to SDLT rates for second homes last April, it certainly hasn’t been plain sailing for many landlords in the UK: the problem is, the waters are only growing rougher.

With political uncertainty acting as a continuous backdrop to our country, confidence in the housing market wavers as landlords start to question the profitability of their investment. So, what exactly do these changes involve, and what can be done to mitigate the impact?

The change to Buy-To-Let tax
Prior to the change, landlords paying higher rates of tax were able to offset the costs of mortgage interest and property repairs against the rental income received before submitting their final tax calculation. This allowed investors to make a profit from rental property as opposed to breaking even, deeming it a reliable and worthy investment.

However, since April 6th, this system is actively being phased out to make way for new regulations that deem the total rental income as taxable, rather than solely the profits. Under the new system, mortgage interest relief will be limited to the basic rate of tax (20%) and given as a reduction in tax liability rather than a reduction to taxable rental income.

As a result, landlords who are on higher incomes will see a significant increase to mortgage interest payments. Those paying the basic rate of tax won’t see a drastic change – however, since taxable income will now be calculated without deduction of extra costs first, some basic rate payers may find themselves forced into the higher rate band as a result.

This process has already begun; with landlords now only able to offset 75% of incurred costs from the mortgage interest as opposed to the full 100% they previously enjoyed.

These changes will only affect residential landlords who own property in their own names, as opposed to those who hold their properties through companies who pay corporation tax.

What does this mean for landlords?

The Treasury has stated that this new tax will prevent landlords from grabbing homes that could go to first time buyers. However, it has been unable to produce any evidence to support this statement, and research from the London School of Economics shows that only a minority of property sales involved bids from investors and regular buyers.

For some landlords, these changes mean that the tax payable on their property investments could rise twofold or more. As a result, any profit made from the rental income would be paid in tax, leaving their investment financially unviable. This has left landlords across the UK questioning whether now may be a good time to sell their properties or sharply increase the rent for their existing tenants.

So, is this the end of buy-to-let? Well, not necessarily. Careful consideration and financial planning could help you mitigate any losses that this change is threatening. Before you start increasing rents or selling up, seek advice from a legal specialist.

What can I do to limit the damage? 

If you’re worried about how the changes to Buy-To-Let tax will affect your yields, it’s a good idea to weigh up your options before making drastic decisions.

Since the introduction of these new changes, a vast number of landlords across the UK have switched to owning properties as a limited company, meaning they are subject to corporation tax as opposed to that of a residential landlord. According to new research by Countrywide, the number of homes purchased and let out by a limited company has reached a record high since the government’s clampdown on buy-to-let. If you already own residential property as an individual, selling it to a limited company may result in you facing capital gains tax, but could be worthwhile in the long-term.

It may also be possible for you to transfer ownership of the property to a spouse who is in a lower income tax bracket. This will allow you to stay in a basic rate tax band and therefore reduce your tax liability. Remember, transferring ownership of property can be complex, so speak to your accountant and an expert property solicitor before doing so.

Another way to work around the new tax change is to lower your mortgage costs by taking out a cheaper deal. However, before switching, check the terms and conditions of your current mortgage. Some lenders will not welcome an early exit and therefore have stinging penalties in place for those looking to remortgage. 

So, while it may not be the end of buy-to-let, it’s certainly important to consider how the new tax changes will affect your investment in the coming few years. At Bird & Co, our expert property solicitors are proud to provide tailored advice to landlords to help you get the most from your property investment. Just get in touch today on 01476 591711 to make an appointment with a member of our team.