Double whammy for buy to let landlords

UK landlords are facing a double whammy of tax changes next year that will have a significant impact on their net earnings.

Set to save the treasury as much as £6 billion these changes need careful consideration.

So what are the changes?

First of all the tax relief of mortgage interest is going to be restricted to the basic rate of tax. This will be brought in over a few years, but in the end, many landlords will end up paying an extra 20% tax on their rental income and some up to 25% extra. Well that’s what they want you to believe but its actually worse than that when you look at the detail.

What will happen in future is that no relief will be given against the rental property for interest and then a tax credit will be applied which is 20% of the interest paid but restricted to the amount of rent received.  Now there are provisions to make sure you don’t lose the loss made, you can carry forward to next year. But the point is that for calculating whether or not you qualify for child benefit – ie are you over £50,000 worth of earnings, the interest will not be deducted.

So if you’re making only a small profit on you rental property because of the interest claim, you will be in for a nasty shock.

For landlords with big portfolios, who are highly geared, this will be a big cost but even the amateur landlord with one property could see significant costs relatively.

The argument goes that landlords who pay higher rates of tax are obtaining an unfair advantage over others who are not. My personal view is that this is nonsense. The landlords are paying higher rates of tax already on their income and to me its fair that they should be allowed to apply legitimate costs against that income, regardless of what their marginal tax rate is. Why is mortgage interest any different to any other tax allowable deduction?

The normal principal in tax is that you work out you profits and then apply the appropriate rate of tax, so to relieve different expenses at different rates is absurd, not to mention complicated. Can anyone else see where this might go in the future?

So that’s the bad news, is there anything that can be done?

It comes down to thinking about the ownership of rental property in the future, should it be held personally or perhaps in a company? 

It can be difficult and costly to transfer ownership of property further down the line or when tax rules change but we advise that careful consideration is taken when acquiring property.

Things to think about

  • Should the property be purchase via a Limited Company [be careful though about stamp duty issues and higher tax rates for investment companies]
  • Should we invest in commercial property instead and/or acquire through a pension scheme?
  • When raising finance look at the best ownership vehicle to enable maximum tax relief .
  • Can other family members participate in the investment who are not higher rate tax payers?

If you disagree then why not sign the petition to ask for the measure to be discontinued, click here

And the second whammy?

The historic 10% wear and tear allowance that landlords used to enjoy is being abolished. This was introduced to simplify the tax system and to recognise that wear and tear should be relieved in a simple way. 

From next year actual expenditure only can be claimed.

So the advise here is to make sure that you don’t get caught out in the changeover. Perhaps consider any expenditure that would qualify under the new rules and make sure it is delayed until the new tax year. 

That way you get one more year of the wear and tear allowance and then legitimately claim the actual expenditure under the new regime. 

Jason Seagrave | Partner | Seagrave French

0115 941 5193 |

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