From tomorrow, Thursday 06 April, buy to let landlords will begin to feel the direct effects of tax changes with relief on mortgage costs being restricted to the basic rate of income tax amid concerns that higher costs could result in higher rents.
And, over the next three years, the proportion of their borrowing costs that landlords can offset against tax will taper down to zero in changes that the industry has campaigned to be cancelled. Some landlords have taken measures to limit the effect on their tax but many are still unsure or even unaware of the change, according to experts.
Since the changes were announced in the 2015 Budget some landlords have changed to becoming limited companies, or transferring ownership of properties to a spouse or partner in a lower tax band but according to John Eastgate, sales and marketing director of OneSavings Bank one in six landlords do not understand the financial implications of the changes.
He is concerned that many will be in for a nasty shock when they find that they can no longer deduct all finance costs from rental income at the end of the 2017/2018 tax year. ‘Indeed, as financing buy to let becomes more specialised and complex, I cannot emphasise enough to landlords, who are considering incorporation, the importance of seeking professional advice as it may not be suitable for everyone,’ he pointed out.
Paul Brett, managing director of Intermediaries at Landbay, pointed out that landlords have had a lot to cope with including tighter mortgage conditions and the extra 3% stamp duty on additional properties introduced a year ago.
‘Landlords will be bracing themselves for further margin cuts as costs increase as they lose the right to claim full tax relief on their mortgage payments. In this regulatory minefield, it’s now more important than ever that brokers work closely with landlords in reviewing portfolios to ensure revenues remain as stable as possible,’ said Brett.
‘There are ways of managing tax, ownership and mortgage products and although this may incur several further fees along the way, it is arguably the most profitable option for landlords. For example, switching to shorter term fixed rate deals, placing your property in a limited company structure, or transferring ownership of one or more properties to your spouse. What won’t work is simply hiking up rents to compensate as most tenants are already paying as much as they can afford,’ he explained.
Ray Boulger of mortgage firm John Charcol said that it is not too late for landlords to seek specialist advice as there is not a one size fits all solution. ‘The new way to calculate income may push lower rate tax payers into the 40% tax bracket. There will be a substantial effect on landlords who receive child benefits, especially those who have more than one child, and for those who will find themselves in the 45% tax bracket,’ he explained.
‘For new purchases setting up as a limited company is one option, as properties held in a limited company structure still qualify for tax deductible mortgage interest rates. However, the impact of capital gains tax and stamp duty will often mean it is not worth switching properties already owned to a limited company structure,’ he added.
Experts also believe that landlords need to become better informed on the regulations and taxation laws so that current and future buy to let property owners can look into new options to own property more efficiently. Education on these matters will ensure a less drastic change in housing prices as landlords manage their properties in the most cost effective ways.