This year the government has slashed buy-to-let landlords’ profits with two unexpected blows.
A massive cut to tax relief on buy-to-let mortgage interest payments and an extra 3% stamp duty to pay on second homes and buy-to-let properties – what a great time to be a landlord!
Not many predicted Chancellor Osborne’s changes to this sector, so there has been little time to prepare for the financial fallout.
The changes effect both UK and UK non resident landlords with the possible impact still to be thoroughly assessed – and felt.
Mortgage interest relief cut
As of April 2017, the new 20% flat rate of tax relief on buy-to-let mortgage interest payments will be phased in. If you are new to the game, or are a Basic Rate taxpayer, you might be wondering what all the fuss is about.
Previously, buy-to-let landlords could claim tax relief on these payments at their marginal rate of tax. For Basic Rate taxpayers, this is 20%. But Higher Rate taxpayers could claim 40% and Additional Rate taxpayers could claim their rate of 45%.
Less profits
This new 20% flat rate will see those landlords in the higher tax brackets lose out on 20-25% of their previously allowed tax relief. This will probably result in a massive decline in their profit margins.
Some estimated calculations have been published by Nationwide Building Society, as landlords brace themselves for the consequences of the new policies.
They looked at an average landlord’s situation: Property worth £200,000, buy-to-let mortgage of £150,000, rental income of £800 per month and a nice annual net profit of £2,160. Nationwide Building Society predicted that the changes would result in this landlord seeing their profits dive to only £960 per annum. Sharp intake of breath all round.
How can you offset the financial damage?
It is widely reported that tenants are currently paying the maximum affordable percentage of their pay packet as rent – so hiking up your rent to cover the difference is not a viable option. Here are a few ideas that might lessen the financial impact on your circumstances as a buy-to-let landlord.
- Transfer property ownership to your spouse or civil partner if they are in the lower tax bracket. Obviously, you have to check that this action doesn’t push them into the higher rate tax bracket.
- Go for the lower interest rates attached to short-term fixed rate mortgage deals. Beware of the additional risk here.
- If you turn your property assets into a limited company then you pay the lower Corporation Tax rate, instead of your income tax rate on your profits. The possible downside of this option is that mortgage providers are less likely to lend to a company.
Some landlords may benefit
- Buy-to-let landlords that are in the Basic rate bracket will be competing on a more level playing field.
- People trying to buy a home may find that prices drop as the buy-to-let market decreases.
- Pensioners who plan to invest their pension pot lump sum in the property rental market may have less competition and more of us will have a so-called ‘Silver Landlord’.
It remains to be seen what damage is done by the Chancellor’s changes to the buy-to-let market. The suggestions above could help you protect your profits before they fully take effect.
Tony Shanks