From April 2017, property investors and landlords will be subject to what has been labelled as the Chancellor’s “biggest attack” on the UK’s buy to let market. There’s no denying that purchasing property to let has become more expensive than a year ago. Since then, landlords have faced an additional surcharge of 3% on top of existing Stamp Duty Land Tax (SDLT) and they have foregone the wear and tear allowance which has now been replaced with a Replacement Relief.
Now, they face further restrictions, as from April 2017, landlords will no longer be able to claim full tax relief on the interest they are paying on their buy to let mortgages or on other finance costs. In light of this, Wilkins Kennedy’s Guildford office ran a Buy to Let event with Seymours Estate Agents and Complete Mortgages to encourage Surrey’s property investors and landlords to come together and ask the experts in the know about what the changes actually were, and how they affected them.
What you need to know
Currently, if you have a loan on a buy to let property, then you can offset the full finance costs related to the purchase of your property when calculating your profits from rental income. The relief will be at your marginal rate at either 20%, 40% or 45% – so you would pay tax on the profit according to your income tax band.
From April 2017, new rules restricting tax relief on mortgage interest will be phased in over four years as follows:
- 2017-18 – deduction from property income will be restricted to 75% of finance costs, with the remaining 25% available as a basic rate ‘tax reducer’
- 2018-19 – deduction from property income will reduce to 50% of finance costs, with the remaining 50% available as a basic rate ‘tax reducer’
- 2019-20 – deduction will fall to 25%, with the remaining 75% available as a basic rate ‘tax reducer’
- 2020-21 – there will be no deduction from property income for finance costs, with 100% available as a basic rate ‘tax reducer’.
Higher rate taxpayers
This means that from April 2017, all taxpayers will potentially see an increase in their annual tax bill – because all finance costs will get relief at the basic rate. The rule change can equally affect basic rate taxpayers as they may be pushed into higher rate tax as a direct result of the change to how rental profits are calculated.
Assuming you are a 40% taxpayer and your property portfolio is worth £500,000, with 50% debt and 4% interest on that debt and a rental yield of 6.5%, tax would be liable on £32,500 of profit by 2020, as opposed to the current £22,500 in 2016/17. The net tax bill would be £11,000 compared to £9,000 in the current tax year, reducing the residual post-tax funds by £2,000.
For some taxpayers the situation could be much worse and lead to an unsustainable position where the tax is higher than the profits generated. The National Landlords Association predicts that landlords paying higher-rate tax will see yields fall from an average of 4.9% to 4.3% as a result of this change.
Ringing the changes
There are some things you can do to mitigate impact of the new changes. Simply increasing rents might seem an obvious solution – but in a competitive market this might not be the right option for many people. In which case, perhaps consider scaling back on non-essential refurbishments as these can quite often amount to higher rents. But, landlords need to get the balance right to make sure the costs are justified for the return.
If a landlord’s spouse is not working, then transferring part of the ownership of the property to take advantage of the spouse’s tax allowance may or may not be appropriate. You could also consider opening up a company and investing in properties that way, or it may be that selling an element of the portfolio or restructuring the debt may be required.
Before making decisions like these, I’d recommend contacting us in order to explore every option available to you.