Landlords beware of tax changes

In the summer of 2015 the UK Government announced a proposal to restrict the amount of income tax relief available on residential properties.

Friday, 8th April 2016, 1:24 pm
Updated Friday, 8th April 2016, 2:31 pm
Changes in tax for buy-to-let landlords on the horizon

Although these changes will not start to apply until April 2017 they will have significant tax cost implications for buy to let landlords.

The changes affect individual landlords and partnerships, but will not affect residential property owned through a company. I believe many landlords will be affected and similarly those who are considering investing into properties.

Currently a landlord can claim the whole amount of interest that is paid on their buy to let mortgage, thus reducing the profit and the amount of tax paid on the business.

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From 2017 this will change as individual landlords will no longer be able to claim finance costs as a deduction from rental with this being replaced by a basic rate tax deduction from the individual’s income.

To give an example a landlord with earnings of £60,000 per year who additionally has four buy to let properties that bring in £68,000 per annum after expenditure, but has finance costs of £50,400 under the current scheme would pay £7,040 tax on properties.

However, under the new rules that are to be fully implemented in 2020 the tax bill will rise to £17,120. This means that the landlord will have to shoulder an extra £10,080 per annum costs, and for many this could be the straw that breaks the camel’s back.

An alternative would be for the landlord to take shelter through a company structure and this would then reduce the tax payable to £6,233 per annum provided all tax reforms take place that the chancellor has promised.

The Government’s changes do appear to be guiding landlords who wish to stay or enter the buy to let market towards limited company status. But changing over could have considerable disadvantages with regards to capital gains tax in particular, that could make the whole exercise pointless. Also as I can count on one hand the number of buy to let lenders who lend to limited companies, and as they have higher rates this could turn people off going limited.

Overall the picture is a bit muddied so it is crucial to take independent financial advice to ensure you make an informed decision based on your circumstances.