This month has seen some new tax changes come into effect and they could make it difficult for landlords to see a return on their investment. This makes it important for them to understand the changes and how to alleviate the problem.
What are the buy-to-let changes?
The biggest change relates to mortgage interest payments. In previous years, those who paid a higher rate of tax could offset the payments against any rental income prior to calculating tax. However, this is now being taken away which means increased tax bills.
The process has already started and landlords are now only capable of offsetting 75% as opposed to 100% of mortgage interest payments. This process will be phased in until 2020 where they will then be unable to offset any of their mortgage interest payments.
This change does not only cause problems for those who pay a higher rate of tax. Once the tax calculations have been made and included rental income, it could mean that basic rate tax payers will end up paying a higher rate of tax.
Easing the tax changes
These changes only cause problems for landlords who own their properties privately. Therefore, they have the option to move their properties into a “beneficial interest company trust” and this could help to ease the burden. Buy-to-let property investments could be moved into limited companies where there will be no need to remortgage and so, only the beneficial interest will be transferred while the mortgage will remain in the name of the landlord.
This was a great option as income would only be susceptible to tax at the corporation rate but there are risks as HMRC are on the lookout for those exploiting this option. Some landlords have made the decision to move their properties into a standard company structure in order to take advantage of a reduced corporation tax rate. However, the risks are still there because landlords may miss out on excellent deals that they once had in place.
Are there any other options available?
There are some options that landlords have to help reduce the impact that the tax changes will have and these are:
Raising rental prices – There is an element of risk that comes with this because tenants will have to then consider affordability but this increase is only an attempt to reduce any losses.
Changing mortgage deal – Transferring their mortgage from an interest only mortgage to a repayment mortgage could be an option and they could opt to transfer all of it or just some of it.
What about selling my properties?
Following these changes, some landlords with a small number of properties may think about selling up. However, before doing so, you should think about what you want in the long-term and how the property market is currently performing. If you purchased your properties at a low price then it may be worth selling now. In contrast to this, if you have planned for a reliable and steady rental income and you have tenants that you can rely on, then you could decide to stick with the property.
Whatever you do, you should consider looking into financial advice before making a decision.
Peter Scully
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