Trim tax bills How to beat the new buy-to-let levy

Property investment

One in five landlords is planning to sell at least one property in the face of the Government’s assault on the buy-to-let sector, according to the National Landlords Association (NLA). But those investors committed to the market are finding ingenious ways to fight back.

The series of punitive reforms began with the stamp duty surcharge and culminated last year in much tighter lending restrictions. But the real hammer blow is the removal of mortgage interest tax relief.

From April only 50pc of mortgage interest payments will be deductible as a business expense. By 2020 the option will be removed entirely for higher earners. The NLA estimates some landlords could pay double the tax of an employee with the same earnings.

Iain Greer, a landlord, was planning to grow his portfolio in western Scotland with confidence about the potential returns.

He was intending to buy in a limited company structure to shield his business from the tax changes, but found his options limited.

He owns one house and is in the process of buying another but his enthusiasm has waned.

He explained: “Seven or eight months ago we were going to go hell for leather. Now you could do something that you think is the right thing to do, then a Budget happens and you’re penalised for the decision you made.”

In 2020, tax relief on mortgage interest will be replaced by a 20pc tax credit, leaving basicrate taxpayers largely unaffected. So bringing your income below the higher-rate threshold could drastically lessen the impact.

1. Change your mortgage

Married landlords will be able to mitigate their tax liability by structuring their borrowing correctly. A landlord who is a higherrate (40pc) taxpayer and who is married to someone paying the basic rate of 20pc or no tax at all could transfer the majority of the mortgage payments to their spouse.

If the property is currently owned by the higher-rate taxpayer, they should set up ownership so they are “tenants in common”.

Ray Boulger of John Charcol, the mortgage broker, said this would allow them to set up the mortgage so the basic-rate taxpayer made 99pc of the payments.

“This would mean 99pc of the cost would be transferred to the other spouse, allowing them to make use of both personal allowances and reduce Iain Greer has changed the terms of his property to dodge cuts to tax relief their tax bill,” he said.

The lower-rate taxpayer would be less affected by the changing rules, because of the 20pc tax credit.

Mr Boulger said buy-to-let investors needed to consider the legal costs involved in changing the deeds and what would happen if their marriage was to break up.

Mr Greer used his expertise from his day job as a mortgage broker to structure his borrowing in this way.

2. Pay into a pension to pay less tax

As Telegraph Money has reported previously, it’s possible to earn as much as £85,000 a year and still pay tax at the basic rate.

The secret is saving into your pension, which reduces your salary for tax purposes. Savers can put up to £40,000 a year into their pots, meaning you can prevent yourself exceeding the £45,000 higherrate threshold.

The attractive incentives available on pension saving mean the Government effectively boosts your contributions through tax relief which, combined with the 20pc tax credit, would counteract the effect of the policy. Of course, the downside is take-home pay would immediately fall, and the money would be locked away until age 55.

This technique is open only to landlords who also have earnings aside from their property. Rental income does not count as “pensionable earnings”, capping a full-time landlord’s contributions at £3,600 a year. Mr Boulger said: “I think the people it would really work for would be those who are close to the higher-rate threshold.”

3. Structure your investments

Investing in some tax-efficient assets could also help landlords trying to offset the changes.

Caroline Le Jeune, of accountancy firm Blick Rothenberg, said all investments generating an income should be held within an Isa to lower your income tax liability.

Investing in venture capital trusts ( VCTs) and the government-backed Enterprise Investment Scheme (EIS) both qualify for tax relief at 30pc as long as certain conditions are met.

4. Give to charity

Altruistic landlords could use charitable donations to reduce their exposure to tax at the higher rate, said Ms Le Jeune.

While charities can claim gift aid on your donation, donors who pay tax at 40pc can personally claim the difference between the rate they pay and basic rate on their donations.

This means a 40pc taxpayer who donates £100 could potentially claim back £25.

‘Seven or eight years ago we were going to go hell for leather – not any more’