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Buy-To-Let Landlords Facing Tax Relief Losses

Buy-To-Let Landlords Facing Tax Relief Losses

Jackie Balboni
4th April 2016

The buy-to-let industry is certainly feeling as if someone has it in for them!  In addition to facing extra stamp duty charges and cuts in tax relief, landlords are also now facing capital gains surcharges announced in the most recent budget.

Specifically, from April 2017, tax relief on buy-to-let mortgage interest will be slashed over a phased period of time and buy-to-let properties will incur an extra 3% stamp duty.

In the most recent budget (March 2016), there was no new tax or surcharge introduced but private landlords were excluded from a drop in capital gains taxes, meaning they will pay around 8% more on any increase in the value of their assets than other investors.

Implications to Different Tax Bands

As a result of these changes, many investors are finding that their property portfolio is not looking quite so profitable going forward.   Up to now, people buying property to let have been able to claim tax relief on their mortgage interest payments at their minimal rate of tax. This means that a basic rate taxpayer would get 20% tax relief, but those at a higher rate would receive 40% relief, while top-rate taxpayers could claim 45%.

When the changes come into force, landlords who pay basic rate tax will see little or no change, but those on higher incomes will find themselves losing out in mortgage interest payments.

Last year, the Nationwide Building Society published estimated figures of how a typical landlord’s profits might be hit by these changes. For example, a landlord with a £150,000 buy-to-let mortgage on a property worth £200,000, with a monthly rent of £800, would currently have a net profit of around £2,160 a year. Under the new system, the net profit would drop to £960.

There are some measures that buy-to-let landlords paying higher rate tax could consider though increasing rents to compensate isn’t the answer (assuming the landlord is charging the rate advised by his letting agency).

Options for Landlords

Landlords could look to switch to shorter-term fixed rate deals to get a lower rate of interest, though these mortgages are considered to be riskier.  Other landlords are considering placing their property portfolio in a limited company structure. The landlord would then pay corporation tax on any profits, which is lower than income tax.  The negative aspect of this approach is that the mortgage options are more limited as fewer providers will lend to a company.

If a landlord’s husband or wife pays lower rate tax, they could transfer ownership of one or more properties to them, providing the switch does not take them over the basic tax threshold.

So essentially, landlords with a lower income are no longer at such a disadvantage to those with large portfolios.  This is certainly a benefit to the growing number of ‘silver landlords’ hoping to use their pension pots to buy rental property.

Professional letting agencies should be contacting their landlords to ensure that they understand the implications of the Chancellor’s changes to buy-to-let taxes and benefits introduced over the past twelve months.  The team at Swansea-based McCartan Lettings has already begun this process to ensure their landlords are taking the most appropriate measures to maximise their property portfolios and related profits.

If you’re a buy-to-let landlord and you’re not sure how these changes will affect your income, then call McCartan Lettings today on 01792 430100.

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