Tax Relief Changes 1st Apr 2017

As we have previously mentioned, changes are afoot to mortgage tax relief. At the moment, landlords are able to claim tax relief on their mortgage interest payments at the rate of tax they pay. Therefore if they are a higher-rate taxpayer, they are currently able to get 40% or even 45% tax relief on their mortgage interest. This will be capped at 20% – the equivalent of the basic rate tax – regardless of what rate of tax they are paying with this change being tapered in between April 2017 and April 2020.

Currently landlords are able to deduct the cost of their mortgage interest from their rental income when they work out the profit on which they have to pay tax. If landlords are no longer able to do this in full, they face an increase in the amount of tax they have to pay. Landlords who pay higher rate tax on rental properties with a mortgage will pay more tax. In saying that, some basic rate tax payers may also be affected as the changes might push them into the higher rate bracket.

Paragon Mortgages has found that 60% of landlords are now thinking ahead and are taking action. Their latest report (based on a panel of 200 landlords) shows that more landlords are willing to buy and fewer are expecting to sell as optimism improves. 22% are more optimistic than previously as they come to terms with the changes. 65% report no change in sentiment, and 12% are pessimistic – down from 18% 3 months ago.

In order to prepare for the changes it is essential that landlords think ahead and come up with a strategy that works for them. 24% plan to increase the rent to cover some or all of the increased cost – not good news for tenants. 21% plan to keep their current rental properties but not buy any more. 16% are considering selling some of their rental properties and not buying any more. 13% of landlords expect to invest in more buy to let properties in the next quarter which is up from 11%.

Tenant demand continues to outstrip rental housing supply and this is not going to change for the foreseeable future. As a result buy to let remains a very strong investment vehicle for many. However landlords will have to factor the new rules into their calculations, and this could affect what they choose to buy, the offers they are willing to make and who buys a property, for example, the investor as an individual or a limited company owned by the investor. It is likely rents will be driven up to compensate.

The Key Place can advise on how best to handle your investment, please contact us now if you would like further information