Last year, the government announced their response to ongoing calls for action over a shortage of housing in the UK and difficulties facing first time buyers. Of the tax changes unveiled, one that marks the biggest impact for buy-to-let investors is mortgage interest tax relief. Here’s what you need to know:
Buy-to-Let Tax Changes
During his last Summer Budget speech in 2017, Chancellor George Osborne announced that, based on personal tax rates, landlords will no longer be able to claim relief on mortgage interest payments. Previously, higher rate taxpayers were able to offset their mortgage interest payments against their rental income before making their final tax calculation, but with this relief being reduced, higher tax bills are on the horizon.
Tax Changes Will Be Phased In
Fortunately, the change is being phased in to give landlords time to adjust. Starting in 2017 and ending in 2020, the amount of mortgage interest landlords can deduct is being reduced from 100% to zero. During this tax year, landlords can claim 75% of this cost at the higher rate.
Who Does This Affect?
The government claims that an estimated 82% of landlords won’t be affected. In addition to the impact it has on high rate tax payers, this change could also impact basic rate payers if their rental income pushes them into a higher bracket. What is important to note, however, is that the change only impacts landlords with private properties and not those who hold them through limited companies.
As a landlord, if your total income does not exceed £45,000 per year, including your rental income, you are unlikely to see a difference in the amount of tax you pay. However, landlords with larger portfolios could see their taxable income being raised considerably.
How Landlords Are Reacting to Buy-to-Let Tax Changes
Landlords still have time to adjust to the new change and reduce the impact on profit long-term. One early solution was to increase rents and put the extra costs onto tenants, but aside from the added pressure this would put on already-stretched tenants, it could also price landlords out of the market. Other potential solutions include:
- Placing a property into a limited company structure
This would enable landlords to pay lower corporation tax rather than income tax on a property.
- Transfer ownership of the property
This is only effective if a spouse or partner pays a lower rate of tax and transference of the property would not increase it.
Speak to an expert at Douglas & Gordon to find out more about your options as a landlord.