It’s been dubbed in some quarters as “The Landlord Tax Grab,” but regardless of your viewpoint the tax changes that come into force on 6th April this year are going to have an impact on Landlords' tax bills and it’s important that we all understand what this means. In a nutshell, the Government want to tax Landlords on turnover and not profit, and this is likely to result in certain types of Landlord paying more tax.
For Landlords with outstanding borrowing on their properties, the reduction in income tax relief will mean that whilst previously the full value of the interest payments on mortgages could be used to offset their tax bills, a schedule to phase out the allowance is now in force for the next four years. Instead Landlords will only be able to deduct the basic rate of tax on their annual tax returns. For the now, current tax year (2017-18), Landlords will be able to deduct 75% of finance cost on their annual tax return, dropping to 50% in 2018-19, 25% in 2019-20 and finally down to 0% (zero) in 2020-21.
However, remember that income tax liability will then be reduced by the basic rate of tax; currently 20%.
In addition to this, wear and tear allowance (currently 10% of your rental income if you claim it) is also being abolished. In its place, Landlords will instead be able to claim the cost of like for like replacements rather than a blanket allowance as was previously the case.
Neither changes are great news for Landlords, particularly those with mortgages and loans on their properties. Being aware of them however can ensure that you plan ahead accordingly and minimise any impact they may have. Some Landlords will be looking to reduce their borrowing with any surplus cash they have in the bank. If you haven’t revisited your mortgages recently then it may be a good time to speak to a mortgage broker to make sure you’re on the right products at the best rates. Some Landlords, particularly those purchasing new properties, are looking at the creation of Limited Companies which are currently exempt from the changes to mortgage rate relief. Others are looking to incorporate their existing properties but this raises the not inconsiderable issues of capital gains tax on any increase in value and a hefty stamp duty fee; we definitely recommend taking professional advice if you’re considering this.
There’s no question that Landlords are suffering with some of the tax and legal changes that have hit the market in recent times. It is important to remember though that the rental market is still buoyant, the number of renters continue to push record hitting highs, and the returns still beat many other types of investment. What’s important is that as a Landlord you are aware of the changes and ensure that you and your accountant are on top of them. Make sure you are maximising the rental income on your existing properties by ensuring your properties are well looked after and properly managed. For new purchases, think carefully about the best way to proceed which may well be as a Limited Company.
It may be time for Landlords to consider investing in a refurbishment of their property portfolio to increase the rental value whilst still being able offset this expenditure against their tax return. Please look at our Refurbishment section of our website for examples of the projects we have completed in the recent years.
For more information on the tax changes, you can also visit the Government's website at https://www.gov.uk/government/news/changes-to-tax-relief-for-residential-landlords
And if there's anything you're not sure about then please get in touch; we're here to help.Back to blog
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