Three tricks to escape buy-to-let clampdown

LANDLORDS face major tax hikes under reforms introduced last week. Many investors will be thousands of pounds worse off and struggle to make a profit.

Worst hit are higher-rate taxpayers — but all landlords must be clued up on the changes. Here, we reveal three tricks to beat the tax grab.

In the past, landlords could deduct all their mortgage interest from rental income before working out their tax bill. For example, say you receive £12,000 rent a year and you have a £150,000 mortgage at 2.99 pc. That means your total interest bill is £4,485 a year.

Under the old system you subtracted this sum from your £12,000 rental income, leaving £7,515.

Higher-rate taxpayers would be charged 40 pc tax on that amount and have to pay £3,006 to HM Revenue & Customs. This perk is being gradually removed over the next three years.

This year, you can subtract three-quarters of the mortgage interest from the rental income before having to pay tax. So, in our example, a higher-rate taxpayer would face a bill of £3,454, or £448 more than that paid last year.

By 2020 all landlords will be charged tax on the full £12,000 and receive a 20 pc tax credit instead. In our example, a higher- rate taxpayer would be charged 40 pc on the full £12,000, or £4,800.

A tax credit worth 20 pc of the mortgage interest in this case works out at £897. That is deducted from the total tax bill, leaving £3,903.

So in just four years, your taxes would have jumped by £897, or 30 pc.

David Hollingworth, of broker L&C Mortgages, says: ‘You can still limit the damage of these changes — it’s all about managing your mortgage costs as tightly as you possibly can.’

SWITCH TO A CHEAPER MORTGAGE

THE easiest way to beat the Government’s tax trap is to cut your mortgage costs by taking out a cheaper deal.

Using our example above, you’d end up with a £3,612 profit in 2020 after you’ve paid your tax and mortgage bills. That’s around £900 less than you’d have made before the changes came in.

You can cancel out the tax hike by switching to a cheaper mortgage.

If you switched from a 2.99 pc deal to a 2 pc deal, you’d boost your profit by £1,200. That means a return of £4,800 after tax and interest.

Before you switch, check the terms and conditions on your current mortgage. Some have stinging early exit penalties worth up to 10 pc of the outstanding balance.

For the top rates, see Best Buys on page 48 or visit thisismoney.co.uk/ mortgage-finder.

PUT YOUR SAVINGS TO WORK

FAMILY Building Society has launched a 2.99 pc mortgage that uses your savings to cut your bills.

To get this offset account you need to put deposit funds into a savings account linked to your mortgage.

You won’t earn anything on your savings. Instead, the money is used to shrink the amount of interest you pay on your mortgage. If you take out a £150,000 mortgage and deposit £30,000 into its savings account, you pay interest only on the remaining £120,000.

Calculations show this leaves you with a £4,330 profit — or £718 more than the £3,612 you’d make on a standard 2.99 pc mortgage.

You need at least a 35 pc deposit in the property to qualify for the deal, and after two years the rate jumps from 2.99 pc to 5.29 pc, which is likely to cancel out the benefits, so you may need to switch again.

Ensure that the deal will apply to a buy-to-let mortgage.

BUY THROUGH A LIMITED COMPANY

IF YOU buy a property to let through a limited company instead of your own name, you’re not affected by the tax changes.

That means you’ll still be able to deduct all of your mortgage interest from your rental income before working out your tax bill — or more accurately, your company’s tax bill.

Companies are charged corporation tax instead of income tax.

This is 20 pc compared to the 40 pc higher-rate taxpayers are currently liable for. By 2020, corporation tax is due to fall to just 17 pc. That works out at £1,278 in tax — £2,625 less than buying in your own name. It gives you a healthy £6,237 profit from your £12,000 rent — £2,625 more.

However, from April 2018 the amount directors can take from a limited company as a tax-free dividend will drop to £2,000, down from £5,000.

Setting up a company to manage your properties involves administration, which comes with extra costs. These range from paying accountants, dealing with Companies House and, from 2019, some landlords may be required to file accounts to HMRC on a quarterly basis digitally, depending on rental income.

Beware that not all lenders offer mortgages to borrowers buying through a company and that on the sale of a property there could be a capital gains charge to the company.

Similarly, any landlords who are considering placing existing buy-tolets within company ownership may see a capital gain triggered on change of ownership to the company.