How will changes to buy-to-let tax affect my property investment?

April 6th didn’t only mark the beginning of the new financial year; it also marked the day that the new changes to Buy-To-Let tax came into full force. These changes have not been met with a particularly positive response from landlords, many of whom now fear that their property investments may no longer be financially viable. After already facing an increase to SDLT rates for second homes, running costs are beginning to be a concern to landlords. With political uncertainty only on the increase, panic is beginning to spread through the buy-to-let market. So, what are these changes and how will they affect your property investment

What are the changes?

Before April, landlords in the higher rate tax bracket were able to offset the costs of their mortgage interest and those of repairs against the rental income generated by tenants before calculating their tax return. In short, this allowed landlords to make a profit from their investment rather than using the rental income to pay for repairs and mortgage interest.

Now, a new system is being phased in which deems the total rental income as taxable, rather than solely the profit. This will result in higher tax bills for landlords, even if their rental income has remained static. The first stage of this process has already come into effect, with landlords now only able to offset 75% of their mortgage interest payments rather than the full 100%. By 2020, this process will be complete, and landlords will no longer be able to offset costs at all.

Under this system, tax relief will come in the form of a 20% basic rate ‘tax credit’ on your mortgage interest to offset against your overall income tax, whichever tax bracket you are in.

How will the changes affect me?

How you will be affected by the change to Buy-To-Let tax will ultimately depend on your individual circumstances: for instance, if you are only making a small net profit from your rental income, you might find that the new regulations could lead to you making a loss.

Similarly, a great number of landlords sitting on the edge of the threshold of the basic rate tax band could find themselves pushed into a higher tax bracket due to the new rules, despite only making marginal profit from their investments. According to research from the National Landlords Association, around 22% of landlords across the country could be forced in to this higher tax bracket as a result. When asked his opinion of the change to the tax structure, the chief executive of the NLA Richard Lambert expressed fear at the impact it would have on property investors as a whole:

“When the Government announced these changes last year, it claimed they would only hit a small proportion of higher-rate taxpayers. We now know that is complete tosh. Now, landlords will face an impossible decision of whether to increase rents and cause misery for their tenants, or to sell-up, and force their tenants to find a new home.” 

It’s no surprise that landlords are starting to succumb to the panic, scrambling to raise rental charges or sell their properties. However, before you make any drastic decisions, it’s worth considering the options you have in mitigating your losses.

What options do landlords have?

While the new tax changes do pose a threat to the economic viability of property investments for a number of landlords, it doesn’t necessarily mean the end of Buy-To-Let. There are certain steps you can take to reduce your tax liability and limit the damage, but remember to always tread carefully and gain advice from a professional before making any decisions.

Since the announcement of the new Buy-To-Let tax regulations, a huge portion of landlords have been switching to owning properties as a limited company rather than as individuals. This allows you to pay corporation tax instead, leading to a potential reduction in your tax bills as a whole. However, this will depend on your own financial situation (i.e. your incomings and outgoings). Furthermore, switching may result in an initial capital gains tax bill, but this could still be a beneficial option in the long-term.

If your partner or spouse is in a lower income tax band, you also have the option of transferring ownership of your rental property to them. This could allow you to reduce your overall tax liability and keep you firmly in the basic rate band. Remember, transferring ownership can be complex, so it’s crucial to gain advice prior to taking action.

At Preston Redman, our specialist team of property solicitors are dedicated to helping landlords get the most from their property investments. So, if you’re concerned about the Buy-To-Let tax and are seeking expert advice on your next steps, don’t hesitate to get in touch with a member of our team today and we will be more than happy to help.