One month to go until the tax change deadline – are you ready?

There’s no more hiding – there’s only a month to go before the tax changes come into force!

Understandably there are still many landlords who have buried their heads in the sand about the upcoming changes, but it’s time to face facts, and find out what’s really going on.

So, this loss of mortgage tax relief? What’s that about?

It’s not an ideal start to the Spring. In a nutshell, the changes mean that tax will now be applied to your full rent rather than the profit after mortgage interest.

Therefore, if you currently have a mortgage on a buy-to-let property you will pay tax on the income you receive from any rent the property receives, minus any mortgage interest payments and additional costs such as maintenance bills and costs incurred with finding a tenant. At the moment, you pay tax on your profits according to your income tax band, so if you’re a basic rate tax payer you’d pay 20% tax, a higher rate taxpayer would pay 40%.

As of 6th April (tax year 2017/18), this is all set to change. You will be taxed on the income you receive from your property before you’ve taken off your mortgage interest payments, with mortgage interest tax relief being gradually be cut back to 0% between 2017 and 2020.

This phasing in of the cuts has been designed to ease the pressure, and will take place from April 6th 2017 to April 6th 2020.

You will still be able to deduct some costs during the transition period, however, these deductions will be gradually withdrawn and replaced with a basic rate relief tax reduction.

  • 2017/2018 – 75% of finance costs deductible from rental income – 25% basic rate tax
  • 2018/2019 – 50% of finance costs deductible from rental income – 50% basic rate tax
  • 2019/2020 – 25% of finance costs deductible from rental income – 75% basic rate tax
  • 2020/2021 – 0% of finance costs deductible from rental income – 100% basic rate tax

Frustratingly, the changes could see many basic rate tax payers tipped over into the higher rate numbers, with the addition of rental rates to other income streams tipping the balance into the next tax bracket. As well as this hiking the amount of tax they have to pay, they could potentially lose out on other credits, such as child tax benefits.

Even worse, if your mortgage interest represents more than 75% of your
rental income, the new tax is likely to completely wipe out your rental income, leaving your investment properties paying their way, but not a lot else.

Wonderful! So how hard will it hit my pocket?

That entirely depends on how much you claim back at the moment! There is no cut-and-dried figure, but according to industry research, people are not feeling overly positive about their future in the industry.

According to the government only one in five landlords are expected to pay
more tax, but a number of industry experts dispute this. If you fall under one
of the following categories, you should expect to see things change:
  • If you let out residential properties as an individual, or in a partnership or trust.
  • UK resident individual that lets residential properties in the UK or overseas
  • Non-UK resident individual that lets residential properties in the UK
  • Individual who lets such properties in partnership
  • Trustee or beneficiary of trusts liable for income tax on property profits
A recent survey by Mortgage Finance Gazette magazine suggested that 35% of the buy-to-let landlord readers are considering selling their property rather than taking the tax hit, whilst the National Landlords Association believe up to half a million flats will flood the market when the changes come into play.

It’s not good news for tenants either. Nearly 75% of landlords believe they will have to increase the rent to cover the impact to their own pocket, which, coupled with the incoming change to lettings agent’s fees does not bode well for an already stretched tenant population.

Is there anything I can do at this stage?

Sort of, but the changes don’t come without their own issues – and you might have left it a little late to avoid all extra tax payments!

If you’re planning on investing in buy-to-let market there’s a loophole which allows companies that own residential lettings properties to continue claiming mortgage tax relief as a normal business after the April 1st date, some soon-to be landlords have been setting themselves up as companies to take advantage of this. If you already own property and want to avoid getting stung, you could consider incorporating your existing rental properties, but beware – this carries hefty taxes of its own, as you would effectively be selling your own portfolio from your personal ownership into the ownership of your company. This means you would have to pay Capital Gains tax on any increase in value that it has seen (and with the property market as it is it’s likely that it will have realised some!) and your new company would be liable for the 3% stamp duty on each property that it buys from you. Before you make any moves, be sure to do your sums and work out which route is the most cost effective for you – whilst it is frustrating to have to consider giving up your mortgage tax relief as an individual tax payer, for many people the ‘set up costs’ of incorporation far outweigh the amount that they are set to spend if they just sit it out.

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