Dealing with the Tax Changes 1st Mar 2016

The tax changes brought into effect in the July 2015 budget will impact buy to let landlords. The changes will be phased in over 4 years from April 2017.

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. From April 2017 this will be capped at 20% – the equivalent of the basic rate tax – regardless of what rate of tax they are paying.
Recent research suggests that 4 in 10 landlords are considering putting their properties into a limited company to limit their exposure to these tax changes.

Companies will not be affected by the changes to individual tax relief and can offset borrowing against the corporation tax due on rental income. Corporation tax is falling to 19% in 2017 and 18% in 2018. Income can be taken in the form of tax free or lower tax dividends by company directors. All good stuff so far, however incorporation brings its own problems with capital gains and possible stamp duty charges, therefore landlords need to do their research to work out what is best for them. Speak to an Independent Financial Advisor to establish what will benefit your individual circumstances.

Landlords should also be aware of changes coming into play in 2019 with regards to how they pay tax when selling their investment property. Currently capital gains tax is due at the end of the tax year but from 2019, this payment will be due within 30 days of selling a property.

And so with all of these changes directly affecting landlords’ income from rental properties, the question is whether there will be a knock on effect for tenants, as surely rents will rise to compensate.

A report conducted by Orchard & Shipman reveals that 86% of landlords believe that the tax changes will discourage investment, leading to a shortage of rental properties. 90% of landlords think that the tax hikes will result in higher rents, with half of those surveyed saying they would be raising rents in 2016 to cover increased costs. However only 18% of landlords said they would be selling up and getting out of the buy to let market completely.

Another recent study has revealed that 68% of landlords surveyed have not increased their rent in the last year, however 86% believe that the increased purchasing costs (due to the Land and Buildings Transaction tax changes) will undoubtedly lead to rent increases.

All of this comes at a time when the UK is facing a massive shortage in rented housing, and therefore everything should be done to encourage, rather than put off, investors. Although wary, the majority of landlords still believe that buy to let is a good investment choice. Demand is continuing to soar due to the shortage of housing and a growing rental market as a result of mortgage issues and rising property prices. As a landlord you should plan ahead, and get the right advice in order to come up with a winning strategy that works for you. The Key Place is happy to advise – please contact us now for further information.