Landlords lose a third of their income to tax traps

A new generation of younger landlords face losing almost a third of their rental property income to the hidden costs of buy-to-let investing.

More than 100,000 properties were sold as second homes or buy-to-lets in the second half of last year, as the housing market boomed in the wake of the Chancellor’s stamp duty holiday announcement in July.

But quirks in the system will leave investors buying for the first time with tax bills far higher than in previous years, accountants have warned.

Buyers under 40 who are bringing up children while still burdened with student debts risk unwittingly triggering additional charges as a result.

A parent- of- two on an annual salary of £ 50,000, earning an additional £10,000 a year from a buy-tolet investment, would pay an extra £2,728 in unforeseen costs, on top of the income duties on their rental profits, according to RSM UK, a tax firm.

This is because of a clawback of child benefit, which kicks in once your overall income exceeds £50,000, plus the amount of extra student loan repayments, which increase as earnings rise.

Landlords used to be able to deduct mortgage interest payments from their total income, which reduced these costs. But the abolition of the tax relief from April 2020 has left landlords declaring bigger earnings on their tax returns and paying more.

Landlords today must declare the money they used to pay their mortgage as income first and apply for a 20pc tax credit later.

That means a landlord charging £950 a month in rent and paying mortgage interest payments of £ 600 a month would have to declare £11,400 in yearly earnings on top of any other income.

Under the old regime, the same landlord would have been able to declare earnings of £ 4,200, after deducting £7,200 in mortgage interest payments for the year. Chris Etherington, of RSM UK, said: “These changes were not meant to affect average earners, but now both higher-rate and basic- rate taxpayers face paying these unforeseen extras due to the way income is taken into account – costs many will not have anticipated.

“They will be hit with a nasty shock when the taxman and the student loans company sting them with more than they were expecting.”

Everyday “Middle England” investors buying one or two properties will be the worst hit, as the wealthiest buyto-let landlords who own vast portfolios tend to own properties via company structures, Mr Etherington said.

“Younger generations will have seen their parents doing well out of rental property, but few may realise just how far the Government has gone in removing the incentive for buy-to-let investment to try to ease the housing crisis,” he added.

Landlord numbers fell to a sevenyear low at the start of 2020, before the pandemic began, as large numbers sold up to escape heftier stamp duties and capital gains taxes in recent years.

Many property investors have seen their incomes fall during the coronavirus crisis, but are currently banned from evicting tenants who are unable to pay their rent.

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