The squeeze on buy-to-let tax relief.


The squeeze on buy-to-let tax relief.

New tax rules to be introduced in 2017 will see a reduction in the mortgage interest tax-relief that landlords can claim.  Currently, a landlord is entitled to claim tax-relief back on their mortgage interest at their marginal rate of tax.  In the face of this change, some property professionals are advising landlords to change how they operate their letting business from private ownership to that of a limited company, as a way to avoid this cost.   However, most experts will agree that landlords must be cautious and get professional tax advice before considering such a move.

New tax-relief rates for buy-to-lets interest relief.

The new regime concerning buy-to-let tax-relief is being incrementally introduced from 6 April 2017 and will be fully implemented by 2020.  In a move, experts believe is aimed to cool the market, the Chancellor has reduced the mortgage interest tax-relief that landlords can claim.  Currently, a landlord who pays tax under a basic rate get 20% relief, those on a higher rate get 40% and those in the top tier are able to claim 45%.  By 2020, a flat rate of 20% will apply to all.  Landlords who are in the top two tiers are set to lose significantly in terms of mortgage interest payments with the new rates.

The Nationwide Building Society recently published estimated figures on how these changes may hit landlords.  A landlord with a £150,000 buy to let mortgage on a property worth £200,000 with a monthly rent of £800, would currently have a net profit of around £2,160 a year.  Under the new system, the net profit would drop to £960.

Further information on these upcoming changes can be found here

Landlords move to avoid tax trap.

This stark reality of losing profits has prompted landlords to move to avoid this new tax trap.   One option many are exploring is restructuring their portfolio into a limited company as a way to get around these new tax-relief rules.  This move has meant that some landlords have had to sell their existing buy-to-let properties, back to themselves, via a newly formed limited company, owned by themselves.  By doing this landlords may avoid paying tax on the cost of running the property.  For example this includes offsetting the ‘allowable expenses’ of mortgage payments, maintenance and lettings fees against their tax bill.  Corporation tax is then paid on taxable profits at a rate of 20%, however, this is due to fall to 18% by 2020.  Switching ownership of a buy-to-let into a limited company is a case of pay now to avoid tax pain later.

Too good to be true?

However, some property pundits are advising caution with this move due to the direct and indirect costs associated with selling a property.  These include capital gains tax, legal fees, and stamp duty on re-purchase.   Changing to a limited company also means negotiating a new mortgage agreement with lenders, which may also incur an additional expense, and a potentially higher interest rate.  For many the cost of switching to a limited company is just too high to justify the returns later.   In addition, there are stringent legal and financial compliance requirements for company directors that many landlords especially those with smaller portfolios may find unduly onerous.

Further information on running a limited company can be found here

Move with caution.

For many the value of switching ownership of a buy-to-let from a personal to a limited company still holds merits.  Depending on the financial and tax circumstances of the landlord the long term benefits may still outweigh the shorter term costs.  Many experts are advising those buying new buy-to-let properties, or those considering consolidating multiple existing properties under a single loan, to do so under a limited company.

The new rules are being phased in by 25% a year until 2020/21 with a mix of the old and new rules being used to calculate taxable income and tax liability.  On this basis alone, we at LegalforLandords, strongly advise landlords to seek independent advice from a qualified tax professional before making any decision on their buy-to-let.  Tax considerations are specific to the individual and what works for one landlord may not work for another.

If you are a landlord and need advice on your letting, give us a call 0333 577 9050, or try us on our free advice line 0800 840 7133.