You may have seen quite a lot in the media recently about changes to buy to let tax relief, but what do the changes really mean for landlords and investors?
If you’re new to buy to let, you might not appreciate just how much of an impact these changes are likely to have on the pocket of individual landlords.
Up until now, buy to let landlords were offered tax relief on the mortgage interest they paid. This has been operated on a sliding scale depending on which tax bracket the property owner fell into. Basic tax rate payers were eligible for 20% tax relief, those in the higher bracket could claim 40% relief, and top rate tax payers could claim 45%.
From April 6th 2017 the way you claim tax relief against a buy to let mortgage will change. This is being rolled out in stages from 2017 through to 2020.
Whats are the buy to let tax relief changes coming in effect in 2017?
If you pay income tax at 40% or 45%, and have a mortgage on your property; from 2017 your buy to let returns could be severely reduced, or even wiped out.
These changes will not affect you if you pay basic rate income tax at 20%.
Look at this example where Mike and Jayne own identical rental houses:
Mike Pays 20% tax rate
Jayne pays 40% tax rate
|Identical property details:|
|Both buy-to-let mortgages:||£150,000|
|Both monthly rental incomes:||£750.00 per month|
|Annual profits BEFORE changes:|
|Rental income: £9,000||Rental income: £9,000|
|Deductable mortgage interest: £5,000||Deductable mortgage interest: £5,000|
|Profit before tax: £4,000||Profit before tax: £4,000|
|Tax on profit: £800||Tax on profit: £1,800|
|20% mortgage relief: £-||40% mortgage relief: £-|
|Tax payable: £800||Tax payable: £1,600|
|Profit after tax:£3,200||Profit after tax:£2,400|
|Effective income yield: 2.1%||Effective income yield: 1.6%|
|Annual profits AFTER changes:|
|Deductable mortgage interest: £-||Deductable mortgage interest: £-|
|Profit before tax: £9,000||Profit before tax: £9,000|
|Tax on profit: £1,800||Tax on profit: £3,600|
|20% mortgage relief: £1,000||40% mortgage relief: £1,000|
|Tax payable: £800||Tax payable: £800|
|Profit after tax: £3,200||Profit after tax: £1,400|
|Effective income yield: 2.1%||Effective income yield: 0.9%|
Of course, this is just an illustration. The higher the interest rate on your mortgage, the more harshly you will be affected by the buy to let tax relief changes.
Buy to let landlords have already taken to social media to vent their frustration, with many suggesting they will need to sell off a significant chunk of their property portfolio to even stay afloat.
One buy to let landlord explains that he is selling off his properties “not because we want to, but because we have to in order to stay solvent”. He goes on to say that he will have to continue downsizing his portfolio every year until something changes or Clause 24 (the clause outlining the buy to let tax relief changes) is removed.
Another new ruling, announced recently, is likely to have further impact on buy to let landlords with a significant portfolio. From September 2017, lenders must consider a landlord’s full property portfolio when assessing lending suitability if the landlord owns four or more properties.
The suggestion is that mortgage arrears are higher when landlords own more properties, and therefore they are more risky to lend to. Predictions are that this will mean higher interest rates for those with more properties, which in turn will see the tax relief changes having a greater impact.
Loss of buy to let tax relief – What’s the solution?
There are several options you could consider.
Try to lower your mortgage interest rates:
If you’re coming to the end of your fixed rate, or are already out of the tie-in period on your current buy to let mortgage, you could try to find a lower rate deal or renegotiate with your current mortgage provider. A drop in your interest rate would help to reduce the impact of the tax relief changes.
If your spouse or partner is a lower rate tax payer, you could consider transferring ownership to them. You will need to ensure that the additional income will not push them up in to a higher tax band though, as this would eliminate any benefit.
Consider setting up a limited company:
When the tax relief changes were first announced, some suggested that moving properties into a limited company structure may be the answer. This would mean that you’d only be required to pay corporation tax on the company’s profit. As corporation tax is lower than personal income tax it was suggested that this would ease the squeeze of the changes. There are several issues with this option, however. Firstly, there are significantly fewer lenders willing to offer buy to let mortgages to companies rather than individuals, meaning you’re likely to be subjected to significantly higher mortgage interest rates. You may also need to factor in higher operating costs associated with running a limited company.
Consolidate your investment and sell off less profitable property:
A recent study by the Residential Landlords’ Association suggests that one-in-four buy to let landlords either have sold or are planning to sell up as a direct result of the tax relief changes. You may want to follow suit and consider consolidating your existing investments, selling off the least profitable of your buy to let properties, or those that are likely to be hardest hit by the buy to let tax relief changes.
If you are a 40% or 45% tax payer with a mortgage on your buy to let property, and are considering selling up your investment before the buy to let tax relief changes come into effect, Quick Move Now could buy your property in just 7 days. For more information about a guaranteed cash purchase from Quick Move Now contact the team on: 0800 068 3366 or fill in a free, no-obligation estimate form.
There are many legitimate reasons landlords may wish to sell up and exit quickly. Recently Managing Director of Quick Move Now, Danny Luke joined Property Tribes Owner Vanessa Warwick to discuss how our professional property buying service can assist landlords.
*Estimate provided by Nationwide Building Society.