If you’re a buy-to-let landlord renting out residential property, you should be aware that the rules for tax relief changed significantly on 6th April, but surveys suggest that very few landlords are. Since the changes will substantially reduce your profit, it’s vital to know what’s happening, and to take what action you can.
What Are the Changes?
Various types of tax relief have traditionally been available to individuals or partnerships acting as landlords. These include relief on mortgage interest, on wear and tear, and on allowable expenses. The first two have been affected by the new measures, but particularly the mortgage interest relief.
Under the old system, you subtracted whatever interest you paid on mortgages or other loans related to a property, as well as fees connected with the mortgage, from the total income from that property, only paying tax on the difference. Under the new system, you’ll be liable for tax at your normal rate for the whole income, less only 20% of the interest paid.
This will mean a slight increase in tax for a landlord in the basic tax band, but the effect will hit those in the higher brackets a good deal harder. If, for instance, you pay tax at the 45% rate and have a property with an income of £10,000 and interest payment of £9,000, your tax bill will increase from £450 to £2,700.
What Can Be Done?
The one piece of good news is that the change is being phased in over a four-year period. At the moment, 75% of mortgage interest can still be claimed, with the full reduction not being reached till 2020/2021. This gives landlords a little time to prepare.
Two strategies are possible. The changes don’t apply to properties owned by a limited company, and some landlords are already changing their business model accordingly. Alternatively, the properties could be transferred to a spouse or other partner who’s in a lower tax bracket.
Both courses, though, involve transferring the property, which could involve capital gains tax, so it’s important to consult a financial advisor before acting.
Allowable expenses, such as professional fees, insurance, utility bills etc., are unaffected, but there’s a change to the way you claim wear and tear. Instead of a fixed 10% relief, you now have to claim for specific expenses and be able to produce invoices and receipts.
All buy-to-let landlords would be advised to seek expert financial advice. You’re very welcome, though, to contact me for an informal chat about your options.