NEW RENTAL PROPERTY ‘TAX’
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