Buy-to-let tax relief changes
Landlords reminded to consider options ahead of next phase of tax relief changes
Accord Buy To Let
While landlords may not feel the pinch of the buy-to-let tax relief changes until they submit their tax return to HMRC in January 2019, the next phase of the reductions come into play in April so it’s time for them to start planning ahead if they haven’t already.
Launched as an attempt to taper the buy-to-let market, the government decided landlords could only claim tax relief at the basic rate of tax (20%). So higher rate tax payers would see a significant reduction in profitability from a let property.
This was introduced as a phased reduction in April 2017 at the rate of 25% per annum, meaning by the tax year 2020/21 rather than paying income tax on their profit minus mortgage interest and other allowable expenses tax would be paid on their gross rent and any allowable tax deductions would only be permitted at the basic rate of tax.
From 6 April this year landlords the second phase of reduction will be introduced meaning landlords can only deduct 50% of their mortgage expenses from their rental income to reduce their tax bill.
During the 2017/2018 tax year we began to see landlords refinancing their properties, and some selling off the least profitable parts of their portfolio to mitigate the looming rising tax costs. While, unsurprisingly the number of buy-to-let mortgage applications made through limited companies is growing as taxation rules are more favourable.
Lenders also began to make changes to their criteria to ensure landlords would be able to afford their buy-to-let mortgage commitments following the changes to taxation.
Many made significant changes to their interest cover ratios - the rent required as a percentage over and above a landlord’s buy-to-let mortgage to meet costs of managing a buy-to-let property - and stress rates to ensure they maintain robust affordability criteria which considers the potential for future increases in mortgage rates. In addition, lenders have implemented stricter underwriting standards to comply with regulatory changes.
One further consideration landlords need to factor in from April is that all their properties must have an Energy Performance Certificate (EPC) rating of ‘E’, or higher, according to new laws.
All in all, things will be trickier for landlords in an already challenging market. Therefore, it is pivotal that landlords don’t bury their heads in the sand and that they assess their portfolio as soon as possible.
Whilst the limited company route seems like a viable option to purchase new properties it is not straightforward. Landlords would need to consider the tax implications, including inheritance tax, so it would be wise to seek advice from a tax expert in the first instance.
Although basic rate taxpayers will not be affected they shouldn’t be blasé about the changes, the new profit calculations could potentially push them into a higher tax band.
Given the complexity of the changes, landlords may be best getting advice from a mortgage broker and where necessary a tax expert who can look at their individual circumstances and recommend the best course of action.
This next phase of change is just one of many bumps in the road the buy-to-let market has had to navigate but there is positive news. We are still seeing new property investors entering the market, and recent alterations to regulation such as portfolio lending will ensure that a landlord is not over-stretched which can only be a good thing.