Landlord tax changes: What's going on?

The most significant change to the way that landlords with mortgages are being taxed is introduced today. Here’s what you need to know:

What’s changing?

You’ve probably heard by now, but when calculating your taxable profit your ability to deduct mortgage interest payments from your rental income is being phased out over the next 4 years.


Who is affected?

The changes affect landlords who incur any finance costs as part of servicing a rented property.
NOTE: Throughout this blog we refer primarily to mortgage interest costs, because buy-to-let borrowing is the most prevalent source of finance in the sector.


What are the details?

To fully grasp what will be changing we need to understand the difference between:

  • Tax deductions - legitimate business costs that are deducted from your rental income before you declare your taxable profit.
  • Tax reductions - reductions to your tax bill after your taxable profit has been calculated.


Here goes….

Until today (6 April 2017) you would have been able to deduct your mortgage interest costs from your rental income before declaring your profit to the taxman. But by the time we reach the 2020-21 tax year you will no longer be able to do this. Instead, you will receive a reduction to your final tax bill, the equivalent of 20pc of your mortgage interest costs – regardless whether you are a higher rate tax payer.


Phased implementation

The changes aren’t being introduced immediately, and will be phased in over the course of the next 4 years.

  • Year 1: Current financial year (2017-18) - This year you can deduct 75% of your mortgage interest costs from your rental income before declaring your taxable profit. The remaining 25% of your mortgage interest will then subject to a 20% tax reduction which is then applied to your final tax bill.
  • Year 2: 2018-19 - Next year, the split will be 50% deduction and a 50% reduction .
  • Year 3: 2019-20 - In year three the split will be 25:75…
  • Year 4: 2020-21 - …until finally, by year 4 you will no longer be able to deduct any of your mortgage interest costs. Instead you will receive just a tax reduction the equivalent of 20% of your total mortgage interest costs.


What’s the take away message?

The most important message to take away is that your mortgage interest costs are no longer deductible and will count towards your taxable income.

Unfortunately, for any landlords hovering on or around the upper limit of one of the established tax bands, it almost certainly means you will be pushed into a higher bracket.

In fact, the NLA predicts that almost half a million landlords who currently pay the basic rate of tax will be forced into a higher tax bracket as a result, but any landlords with buy-to-let mortgages could see their tax liability increase regardless of whether or not they pay the basic rate.


How badly will I be affected?

Your exposure will depend on your annual mortgage interest payments, but for illustrative purposes we have broken down the averages below by portfolio size.

  • Single property £3,600
  • 2-3 properties - £8,600
  • 4-5 properties- £16,300
  • 5-10 properties - £18,200
  • 11-19 properties - £24,900
  • 20+ properties - £38,000


Is there a way around the changes?

Yes, but only if you own your properties as part of a limited company, in which case you are exempt and pay corporation tax on your profits alone. However, incorporating is not a straightforward task, and transferring personally held properties into a company incurs potentially both capital gains and stamp duty charges, which will price the process out of most landlords’ financial capabilities.


What are my options?

There are a few options for landlords who will be hit by the changes:

Incorporate: as above, many landlords have taken this action already, but sadly the costs involved mean it isn’t an option for everyone
Raise rents: faced with increasing costs of providing housing many will have to raise rents in order to cover costs.
Sell up: Many landlords will not be able to absorb the increased costs and will need to sell. There’s already evidence of this happening.


What is the NLA doing about it?

To date the NLA has, and continues to, lobby government over the changes. However, in our meeting with the Treasury earlier this year it was clear that while the Government is willing to listen to our arguments, they have yet to be convinced.

In order to provide a more compelling evidence base we have commissioned a large scale research project to outline the impact of the changes on the sector. The project is being handled by Capital Economics, one of the world’s leading economic research companies, and we’ll be sharing the findings with landlords and the Government in due course.

The NLA also donated £10,000 to the (eventually unsuccessful) Judicial Review to fight the case at the High Court, and we remain, with other industry stakeholders, part of the Tenant Tax Coalition raising awareness on the matter.


What should I do?

If you are yet to do so, our advice is to crunch the numbers as soon as possible in order to assess whether you will be affected by the changes.

Remember, the NLA exists to support landlords to make the most of their letting businesses, helping you to stay informed and offering invaluable advice.

We provide a list of trusted and vetted tax and accountancy specialist services through our Recognised Supplier scheme, including bespoke accountancy software from SimpleTax, which helps you to calculate and submit your tax returns accurately and directly to HMRC, even if you are not an expert.


For more information about the NLA, visit www.landlords.org.uk

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