This year has been a busy one for buy to let landlords, as they’ve been bombarded with changes in tax legislation. We’ve put together this brief summary on the changes to legislation around interest relief restrictions and property repairs & renewals, to make things clearer for our clients.
Previously, a buy to let landlord could deduct the cost of their mortgage interest from any profit they made on the property, and then pay tax on the remainder. So for example, if you made £10,000 in a tax year on one property, but the mortgage interest amounted to £9,000, you could take that £9,000 from the £10,000 you made, leaving you with £1,000 to pay tax on. This would ensure you at least made some profit.
However, that will now change. Mortgage Interest Tax Relief is being limited to 20%,a basic rate tax reduction, phased in over several years up until 2020. This means that in the future, a buy to let landlord will have to pay tax on the full amount of any profits made, with only 20% of the mortgage interest amount given as relief.
So to follow on from our earlier example, a higher rate taxpayer landlord would work their profits out as £4,000 (40% of £10,000), and then be given a relief of £1,800 (20% of £9,000, the mortgage interest), so they’re now paying £2,200 tax.
So what does that mean for me?
To put it simply, if you are a higher rate taxpayer whose mortgage interest equals or exceeds 75% of your rental income, you will not make any profit.
For additional rate taxpayers, this threshold becomes 68%. Basic rate taxpayers shouldn’t see any change to their tax liability, however it’s important to be aware that this new way of calculating profits may push you into a higher tax band, which would then affect your profits.
Is there any way around this?
One option that many buy to let landlords are considering is setting up a limited company to manage the property business. This is because limited companies are not affected by the changes to tax relief. Some are also considering transferring the ownership of the property to a spouse or partner who occupies a lower tax band.
It’s important to be aware of the implications of doing so, however. The government will treat any transfer of ownership, whether to a company or a spouse, as a sale. This means you may have to pay Capital Gains Tax. The spouse to whom the property is transferred may also be pushed into a higher tax band in so doing, so it’s important to be aware of what the outcome of such a move will be.
Finally, you should be aware that many lenders offer limited options for mortgages to companies vs. private landlords, so be sure to check this out with your current lender and any lenders you might wish to work with in future before doing anything. All in all, you’re best off having a serious chat with us here at KA Farr & Co before doing anything hasty.
Unfortunately, that’s not all for private landlords. Wear and Tear allowance is also seeing some changes that will make life harder for buy to let landlords. Landlords are no longer allowed to write off 10% of their rental profits as notional wear and tear. Instead, you’ll only be able to claim relief on costs you have actually incurred, such as if you had to buy a new boiler. You’ll also have to produce receipts for these costs.
Additionally, a stamp duty surcharge for landlords was recently announced, alongside a requirement for landlords to pay Capital Gains Tax on any profits within 30 days of selling a property, effective from April 2019. This may put many landlords in a particularly tough spot, if a buyer cannot produce the cash immediately for a purchase, as they will be paying the tax prior to actually receiving their money.
All in all, there’s a variety of important changes to the way tax and relief works for buy to let landlords. We appreciate that it’s not easy to keep up to date on the latest legislation when you’re running a busy property business, which is why we offer our services as Chartered Accountants. We take care of these compliance issues and help you to minimise your tax bill, letting you get on with what you do best.
To find out more about our services and how we can help you, get in touch today or call us on 01704 211 434.