Recently, Buy to Let landlords have been faced with two financial blows. Firstly, the imposition of an extra 3% stamp duty on second homes, and secondly, cuts to tax relief on Buy to Let mortgages, due to be phased in from April of next year.
So what are the changes and how will they impact you?
New tax rules for Buy to Let landlords
Up until now, landlords have been able to claim tax relief on their mortgage interest repayments at their marginal rate of tax.1
Higher rate taxpayers will now have to shell out more income tax (effectively equivalent to 20% to 25% of their mortgage interest payments), as the ability to deduct mortgage interest from their rental calculations, before calculating their tax bill, is taken away.2
By 2021, all landlords will have to pay tax on all gross rental income received, less allowable expenses. This effectively means that landlords will be taxed on their turnover and not their profit.3
Let’s look at an example of a mortgage of £1,000,000, with mortgage repayments in the region of £25,000 and a rental income of £50,000 (less allowable expenses). Under the current regime you would be able to offset the full rental income and allowable expenses from your gross profit. The income tax bill for a top rate taxpayer would be £11,250. By 2021, you will pay income tax on the full rental income (less allowable expenses), in the region of £22,500. The tax relief allowed will be just £5,000, resulting in a tax bill of £17,500, an increase of £6,250.
These changes may also affect lower rate taxpayers, if the changes push them up a tax bracket as a result of the extra income.
So what are your options?
- You may have the option of transferring your property ownership into a Special Purpose Vehicle (SPV – Limited Company structure). This means profit will be taxed utilising Corporation Tax rates which, at 20% and falling, are much more favourable than income tax rates4. This may narrow the range of lenders available to you. Our Mortgage Managers have extensive specialist lending experience and relationships with over 80 global lenders. If this is something you would like to discuss with us, please don’t hesitate to give us a call on 020 7519 4985.
- If the ownership of the property is split between you and your partner, you can potentially adjust the percentage share of ownership between you. This may reduce the tax liability for the higher rate taxpayer.5
- Top slicing may potentially be available to you, if you have surplus monthly income. This income can be used to help you meet lenders’ affordability criteria, if the rental income earned from your Buy to Let property is too low. This may help you to maintain your level of borrowing despite the changes to tax relief, which could reduce your affordability against your rental income, due to new lending criteria.
- Lastly, you can speak to one of our specialist advisers to see if a lower fixed rate deal could reduce your mortgage interest repayments.
So what if you aren’t a higher rate taxpayer with Buy to Let properties?
Although for some, these changes will create challenges, for others it may very well create opportunities. If you are a Buy to Let property investor in a lower income bracket, the playing field is about to become more level for you. As a result, ‘silver landlords’ hoping to use their pension pots to purchase investment properties may be encouraged to join the market. For those looking for a new home there may be benefits to be reaped if property prices drop as the consequence of reduced competition from Buy to Let investors.6
If you would like to discuss any of the options above with one of our specialist Mortgage Managers, who offer expert advice for Buy to Let landlords, please contact us on 020 7519 4985 or send us an email. Our specialist Mortgage Managers have a wealth of experience in dealing with large and complex mortgages. Using this knowledge we can help you to navigate the complexities of these new rules, and make the most of your property investments.