EDP Norfolk - - Last Word In Property -

April 6 marked the in­tro­duc­tion of the pro­found changes to the tax­a­tion of buy-to-let in­vest­ments, leav­ing land­lords scram­bling around try­ing to pro­tect them­selves from higher tax bills due to the re­duced de­ductibil­ity of mort­gage in­ter­est.

From this date, buy-to-let in­vestors who are also higher rate tax­pay­ers can no longer off­set all of their mort­gage in­ter­est against rental in­come be­fore cal­cu­lat­ing the tax due. The re­duc­tion will be phased in be­tween now and 2020 and will be re­placed by a 20 per­cent tax credit.

In year one, (2017/18) land­lords will be able to off­set 75% of their mort­gage in­ter­est against rental prof­its then 50% in 2018/19, 25% in 2019/20 and noth­ing in 2020/21.

Al­though it may seem that it only af­fects those who al­ready pay higher-rate tax, the way the ‘tax’ is struc­tured means that it will push some ba­sic-rate tax­pay­ers into the higher-rate bracket be­cause their net rental in­come will ap­pear ar­ti­fi­cially higher due to the re­duced (and even­tu­ally) elim­i­nated de­ductible of mort­gage in­ter­est. Al­though re­placed with a ‘tax credit’, this tax­able rental in­come ‘in­fla­tion’ will, in cer­tain cases, cause means-tested ben­e­fits to be lost, which will hurt a lot of peo­ple who are just or­di­nary Bri­tons try­ing to im­prove their lot. It should be noted though that the change does not ap­ply to those who own prop­erty through lim­ited com­pa­nies, just pri­vate in­di­vid­ual land­lords.

To mit­i­gate the ef­fects of this new ‘tax’, land­lords will need to be­come more fo­cused on cost cut­ting, es­pe­cially mort­gage in­ter­est costs (where pos­si­ble). If they have sav­ings, they should look to get an off­set mort­gage, which means in­ter­est is only charged on the net bal­ance, thus low­er­ing the monthly in­ter­est cost. Other ways to re­duce mort­gage in­ter­est in­clude re­mort­gag­ing to get a bet­ter rate of in­ter­est, or re­duc­ing the mort­gag­ing amount via over­pay­ments. An­other way to mit­i­gate the ef­fects is to in­crease rents, which is never a pop­u­lar op­tion but an in­evitable one for some land­lords.

A re­cent sur­vey from The Res­i­den­tial Land­lords As­so­ci­a­tion found that two thirds of its mem­bers ex­pected to in­crease rents to deal with the new tax and the in­creases were likely to be in the or­der of 20-30 per­cent, so the im­pact of this tax is on ten­ants also. Over­all it is a ‘lose lose’. Good work West­min­ster!

Jon Hook, the le­gal ex­pert from Nor­wich Ac­coun­tancy Ser­vices

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