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Landlords adapting to controversial tax change

The nation’s landlords are adapting to ongoing restrictions to tax relief on buy-to-let mortgage interest, according to Mortgages for Business.

Upon releasing its latest Property Investor Survey, the firm says landlords’ appetite for further investment has not been dampened.

The proportion of surveyed landlords seeking to expand their property portfolios has grown to 48%, up from 45% in November and 41% a year ago.

Meanwhile when it comes to buy-to-let mortgages, landlords have been increasingly choosing to fix for five years instead of three.

Five-year fixed rates are now the preferred option for 42% of respondents, up from 33% in November and twice the level recorded in May 2016.

Three-year fixed rates are now less popular than ten-year fixes, being chosen by just 5% of respondents – less than a third of the figure recorded a year ago.

Mortgages for Business’ survey was carried out in May and attracted almost 200 responses from landlords and property investors.

“Although we expect buy-to-let lending to reduce somewhat this year, these results demonstrate that landlords are a resilient bunch, capable of adapting their investment strategies to successfully accommodate the new fiscal and regulatory landscape,” comments Steve Olejnik, chief operating officer of Mortgages for Business.

He says that incorporation – which allows landlords to offset the impact of April’s tax changes – has now become standard practice.

 

https://www.lettingagenttoday.co.uk/breaking-news/2017/6/landlords-adapting-to-controversial-tax-changes

Property industry reaction to election result

After a night where we saw the credibility of the pollsters shattered, calls for Theresa May to resign after a crushing defeat, the housing minister losing his seat and a jubilant Jeremy Corbyn high-fiving Emily Thornberry in the breast, we catch our breath and take a look at how the property industry has reacted.

Jeremy Leaf, north London estate agent and a former RICS residential chairman, says: “A hung parliament will result in an extended period of uncertainty with decision-making kicked into the long grass. Theresa May is correct – we need a period of stability as that will quash uncertainty which is bad for the housing market – but it is not clear at the moment whether she can deliver it. Stability is crucial in enabling people to make big decisions such as buying and selling property.

The hopelessness we are seeing on the ground about not being able to get on the housing ladder has come through. If there is one message that has come out of this election, it is that the young have voted overwhelmingly for change.

Politicians will have to consider the needs of the young more than they have in the past which could mean more help for first-time buyers, perhaps extending Help to Buy so that it covers older properties as well as new build, dealing with affordability issues and more help on stamp duty.

One thing all the parties agree on is that we need more housing so it has to be a priority for whichever formal or informal coalition is created.”

Russell Quirk, founder and CEO of eMoov.co.uk, comments: “As we awake today to the opposite of a strong and stable administration but to a rather unexpected hung parliament, I fear that the property market’s post-election return to normality that I’d hoped for may be rather further away still.

Political instability breeds procrastination on the part of homebuyers and sellers and for over a year now we have seen the effects of that on volumes, if not so much prices, as a consequence of the EU vote and then the snap general election.

A hung parliament means that Theresa May does not have the mandate that she sought for herself and for a ‘hard Brexit’. Whilst the Conservatives may be able to form a minority government propped up by the DUP in Northern Ireland, we now face the serious prospect of the selection of a new Prime Minister and then, probably, a further general election in the autumn.

So whilst the UK voter may understandably develop electoral fatigue, transactions in the property market may also stay somewhat anaesthetised until it’s re-awoken by something more politically and economically decisive than we have seen over the past 24 hours.
In addition to the prospect of Theresa May being forced out for grabbing humiliation from the jaws of victory, we will also see yet another Housing Minister in post by next week given that Gavin Barwell has just lost his Croydon Central seat.  That’ll be our 6th Housing Minister in almost as many years.

Regardless, I suspect that the housing brief will take a back seat now, despite politicians’ promises in recent weeks, given the combined weight of negotiating Brexit, stabilising our economy, button-holing political support across the aisle on every vote and, inevitably, campaigning again for the next poll.”

Richard Pike, sales and marketing director at Phoebus Software, had this to say: “The election result shows again that nothing is certain in politics.  What we needed was certainty through a majority, what we are left with is further uncertainty through a hung parliament.  The result  could affect  not only domestic policies but the whole Brexit process.

The Conservatives need to form a Government in whatever way it can if it is to be ready for Brexit negotiations to start in ten days’ time and in order to stabilise the economy. Unfortunately until a new Government has bedded in, many areas that we as an industry wanted to see action on such as housing policy, may well take a back seat”.

Charles Smith, managing partner of LREA, had this to say: “Uncertainty is always unsettling for all markets, not least the property market. Despite this, it was encouraging to hear Michel Barnier making considered and welcoming statements this morning about an EU/Brexit deal, a contrast to the previously hard line being issued by the British government.

Any signal of a mutually happy exit deal will be very welcome, especially in the financial services sector, so important to a healthy property market. The next 48 hours will be very interesting.”

John Phillips, group operations director at Just Mortgages and Spicerhaart says, “On reflection, I think the housing market has proved to be pretty resilient, all things considered. This is particularly true in terms of the last year and a half, with the Scottish referendum, the snap general election and Brexit. Although the mortgage market has reported a slight slowdown in the last couple of weeks in the run up to the election, this was to be expected, and now that the great British public has spoken, we must once again keep calm and carry on.

Some buyers and sellers have recently adopted the wait and see approach and it is likely that the market will quieten down again next week while things start to settle down. However, as things start to unravel, I am hopeful that the market will soon get back to the norm. We must also remember that housing demand is still outstripping supply, people still want to own their own homes and lenders are still cutting interest rates. Ultimately it is these strong fundamentals that will continue to underpin the market.”

Nick Leeming, Jackson-Stops & Staff Chairman, comments on the General Election result: “The UK was promised a period of stability but today’s announcement provides anything but at this stage. All markets abhor uncertainty and the housing market is no exception. The priority now must be for politicians to provide reassurance by forming a Government as quickly as possible.

The housing market has already been the recipient of doom and gloom in the news this week and certainty is now required to inject confidence and increase fluidity across all levels.

With Gavin Barwell gone, it will be interesting to see what happens to the long awaited Housing White Paper that disappeared from the scene since its publication in February. Regardless of how the Government is formed, it is clear from each of the main political parties’ manifestos that housing is a priority and so a clear strategy must be put in place to tackle the problems of supply, high transaction costs and affordability.”

John East, Director of KFH Land and New Homes, said: “The property market thrives on confidence and it’s important the uncertainty of a hung parliament is quickly resolved and a clear strategy is set out to tackle housing shortfalls, particularly in London.”

Robert McLaughlin, Sales Director at KFH, said: “It’s important a government is quickly confirmed in order to provide all corners of the economy with confidence. Motivated buyers and sellers have not been put off by the politicking of the last two years and we expect that to continue now the election is out the way.”

Carol Pawsey
, Lettings Director at KFH, said:  “The spotlight is firmly on the rental sector as a key component in shoring up housing supply. The new government, however it is compiled, needs to ensure we have a balanced private rental sector that attracts investors and landlords to the market while looking after the long-term interests of the increasing number of tenants looking for quality long-term rental homes.”

Election and Brexit uncertainty delaying tenant moves, says Landbay

The prospect of today’s General Election as well as ongoing uncertainty surrounding Britain’s exit from the European Union is having a negative effect on tenant demand.

The latest Landbay Rental Index shows that average UK rents grew by 0.02% last month – the slowest pace of growth for over five years.

Figures show that London is leading the slowdown with annual growth in the year to May coming in at -0.94%.

Landbay says that rents in the capital have now fallen for 12 consecutive months thanks to dampened demand and heightened supply.

According to the Index, London was the only UK region to see rents fall in May, but seven out of 12 regions ended the month with a slower rate of growth than seen in April.

Across the rest of the UK, growth in the year to May was 1.62%.

Last month, the best year-on-year and monthly figures were recorded in Scotland at 1.27% and 0.11% respectively.

“The election is one of many external factors influencing activity in the buy-to-let market at the moment,” says Landbay founder and chief executive, John Goodall.

“Yes, uncertainty about the future of the UK will cause some people to delay a decision to move, but affordability pressures are also starting to pinch the pockets of renters across the country.”

“Wage growth is now lagging behind inflation for the first time since mid-2014, and with less money to spend on such a major monthly outlay, renters will be factoring this into their tenancy decisions,” he adds.

“On the supply side, a wave of new rental properties caused by last spring’s hike to Stamp Duty, together with falling house prices, will no doubt both be playing a small part in the ongoing softening of rental growth.”

Goodall says that barring a ‘major surprise’ in today’s election or ongoing Brexit negotiations, long-term population and constructions trends suggest that average rents will soon be growing faster than inflation once more.

Earlier this week, HomeLet reported that average rents fell for the first time in eight years during May.

 

https://www.lettingagenttoday.co.uk/breaking-news/2017/6/election-and-brexit-uncertainty-delaying-tenant-moves-says-landbay

Should the government consider a stamp duty holiday for first time buyers?

The latest analysis from estate agent, haart, has revealed that across England and Wales house prices fell during March by 0.2% and are down 3.2% on the year. According to the estate agent, average house prices are now sitting at £223,224.

haart’s data showed that new buyer demand for homes fell by 10.1% on the month and is still down annually by 34.6%. Additionally the number of properties coming onto the market has risen by 0.1% on the month, however is down by 23.8% on the year. This month there are 10 buyers chasing every property across England and Wales.

The market has become more efficient this month, as the number of transactions has decreased at a higher rate than the number of viewings has increased. Meaning that buyers are choosing to look at fewer properties before they buy.

The average purchase price for first-time buyers has risen on the month by 7.7%, and 0.1% on the year. This comes as the number of first-time buyers entering the market has fallen by a significant 10.1% on the month, and by 34.6% on the year.

As average purchase prices rises, so does the average amount first-time buyers are paying for their deposit, by 6.3% on the month, however have increased by 3.3% on the year.

The average property price in London has fallen by 1.7% on the month and 0.5% on the year. The annual fall was less than across the UK. The number of new buyers entering the market has fallen by 8.7% on the month, however, is down by 32.3%. At the same time, the number of new instructions has risen 1.4% on the month, however, is down by 28.6% on the month. Sale transactions are up by 5.7% on the month, however are down by 25.1% on the year.

The number of tenants entering the market has dropped this month, by 11.1% on the month, and 30.7% annually. Despite a drop in demand, rents have increased by 1.1% on the month, as the average rent now sits at £1,250 across the UK. Demand in London has also fallen by 4.1% on the month, and by 32.9% on the year. Rents have fallen by 1%, and the average rental price now sits at £1,779 across London.

The number of landlords registering to buy has fallen this month, by 10.4% in England and wales, and by 10% in London. The annual fall is greater, 39.4% and 55.7% on the year respectively. The number of buy-to-let sales rose on the month by 0.1% in England and Wales, but fell by 18.5% in London. This comes as sale prices rose 5.9% across England and Wales, but fell by 2% in London. This is down 2.3% on the year for England and Wales, but up 11.9% on the year in London.

Paul Smith, CEO of haart, had this to say: “Elections usually see a slow-down in the market, and this year is certainly no different. However thankfully this time round the run up period is short, and soon the property market can jump off this latest political rollercoaster and resume activity again.

A General Election should be a good thing in the long run. A clearer vision on Brexit should hopefully allow for a new Government to stop being distracted, and put more pressing issues – such as housing and homeownership – first. As the chronic housing shortage continues to spiral out of control, and the size of deposits and stamp duty continues to soar, purchasing a property remains nothing but a pipe dream for millions. And that is hardly a vote winner.

The Government should be radical and consider:

A Stamp Duty holiday for first time buyers

Incentives for older families looking to move up the ladder

Incentives for older people looking to downsize

These policies would increase fluidity in the market, and free up more properties – ensuring that more people have an opportunity to put roots down in a community and to have somewhere they can truly call home. Clearly there will be an impact on tax take – but new home owners spend lavishly on white goods, carpets and other services which all carry a 20% VAT.”

 

http://www.propertyreporter.co.uk/property/should-the-government-consider-a-stamp-duty-holiday-for-first-time-buyers.html?utm_source=Email+Campaign&utm_medium=email&utm_campaign=21136-206855-Campaign+-+15%2F05%2F2017+SHAW

PROTECT YOUR RENTAL INCOME WITH A PROPERTY MANAGEMENT COMPANY

What is it?
Clause 24 of Finance Act 2015 will stop private landlords from using 100% of their mortgage interest to offset against their tax bill. It will begin to take effect from April 2017 through a staged process with the full effect coming into place by 2020.

How will it affect you?
As an example; if you have a Rent Roll of £125,000 and Mortgage Costs of £50,000 your effective rate of tax will be 52%. That is a tax increase of 173%. In more general terms this means:

  • A possible tax bill even if a private property business makes a loss
  • A tax on revenue NOT profit
  • A possible tax bill equal to 100% of profit
  • An unplanned move from the Basic Rate to Higher Rate Tax Band
  • A sustainable business becoming an unsustainable business.

What should you do?
The “informed” view is that you should transfer to a Limited Company because you will can to continue to offset mortgage interest and suffer only 20% Corporation Tax. There are significant problems with a Limited Company:

  • The transfer will be treated as a disposal for Capital Gains Tax. You will pay 18% or 28% of the gain you have made. The gain will be calculated at Market Value. On a gain on a property of £100,000 at 28% you will pay £28,000.
  • You will pay Stamp Duty Land Tax on the transfer. On an average value of £600,625 for a property based in London this will result in a cost cost of £38,050 per property.
  • You will pay Annual Tax of Enveloped Dwellings (ATED). Recent rules demand that property companies pay £3,500 per annum ATED on a property valued at £500,000 and over.
  • You will not qualify for Business Property Relief for Inheritance Tax. Gifts of assets held in a property company will be subject to Inheritance Tax of 40%. A property with equity of £100,000 will cost £40,000 in IHT to pass on.

Can this really be your only option?
No, you can restructure your property portfolio using a Property Management Company Trust.

The Trust is a structure used by our property investors and owners who wish to protect the income potential of a portfolio of assets.

Using a strategy proven and implemented successfully for over 20 years the assets can be moved – under statutory protection – into a protected trust environment. It has the following features:

  • Assets transferred using statutory reliefs.
  • Involves no “tax avoidance”.
  • Profits generated from protected assets are tax exempt.
  • Does not require a DOTAS reference.

Key features:

  • Initial transfer is free of Capital Gain Tax under statutory reliefs (Section 162 of the Taxation of Chargeable Gains Act 1992).
  • No Stamp Duty Land Tax is applicable as there is no transfer of title.
  • Lenders retain 1st Charge on the property.
  • The portfolio is managed by your property management company (a UK fiduciary company) with full investment powers.
  • Net profits from rent roll pass to the UK fiduciary.

Protect Your Rental Income

Understanding malicious and accidental damage

Any damage to your property is a big problem as a landlord and can lead to insurance claims. There are two main caused of damage, malicious or accidental. It is, therefore, important to know the differences between the two in order to get the right cover from your insurer. Not having adequate cover can leave you with a nasty bill.

 

What is malicious damage?

Malicious damage is damage caused by either your tenant or their guests intentionally to the rented property. This covers anyone who is lawfully allowed to be on your property.

Malicious damage could include smashed windows, doors or furniture, arson in the property, and graffiti on property walls or furniture.

For malicious damage to be covered by an insurer you must be able to prove that the damage was caused with intent and that it’s been reported to the police. This means you’ll need to provide a crime reference number and police station details.

 

What is accidental damage?

Accidents can happen. Accidental damage is unintentional and usually occurs suddenly, and can include physical damage and/or loss of function.

Accidental damage could include a ball being kicked through the window, a nail hammered through a water pipe, or falling through the ceiling when in the attic.

There are certain exclusions not usually covered by accidental damage, these include:

  • Fair wear and tear
  • Pet damage
  • Defective design or workmanship
  • Contents damage
  • Damage caused by building works

 

Can you claim from a deposit for damages in the property?

It is not only insurance cover that you need to be aware of when malicious or accidental damage occurs in a property.

If your property is not returned in the same condition as that at the beginning of the tenancy, and there is evidence of malicious or accidental damage, then you may be entitled to make deductions from the tenant’s deposit. These deductions should always be fair and reasonable and you must allow for fair wear and tear in the property which does not qualify for a deduction of the deposit.

In mydeposits experience, cleaning, damage and redecoration are the most common causes of dispute between a tenant and landlord.

 

Who is liable for the damage?

Even though malicious and accidental damage to your building has been caused by tenants it will fall to you, the landlord, to pay for any repairs. It is, therefore, vital you have comprehensive insurance cover.

Associate director at Total Landlord Insurance, Steve Barnes, explains the importance of having malicious and accidental damage cover included within your policy.

“Whilst your deposit could cover some of the damage in the event of malicious damage by the tenant or their guests, the likelihood is that the damage will be several times the deposit you have taken.

Understanding malicious and accidental damage

How long does it really take to buy a house?

Recent research has revealed that property viewers take, on average, 27 minutes to decide whether to buy a property.

However, Linda Jeffcoat, from property search and acquisition experts,Stacks, had this to say: “While it may be accurate, this is a misleading figure. The time that has been invested in order to make that decision is considerable.

For buyers to find themselves in a strong decision-making position, our estimate is that they will have spent at least 80 hours, building up their knowledge and expertise.

A typical breakdown is:

10 hours – Conducting extensive online research

3 hours – Speaking to estate agents

15 hours – Driving around the country with kids and dogs, spending time in good and bad pubs, viewing the neighbours and the neighbourhood, generally familiarising yourself with the lie of the land

40 hours – Viewing 20 houses (the minimum we would recommend to place a buyer in a strong decision-making position)

16 hours – Sleepless nights (an inevitable part of house-hunting)

Total: 84 hours

Linda continues: “Some buyers will spend a great deal longer. The Internet is unquestionably responsible for a great deal of wasted time. One of the greatest dangers of portal-perving is that buyers tend to spend too long on the computer, and not enough time on the road.  Property simply isn’t a ‘virtual’ commodity. The impression you get from pictures and descriptions may vary dramatically from the real thing. So by all means start your search on the internet, but get on the phone, talk to the agents, and go and see as much property as you possibly can.

Buyers relying on the internet should also realise that the portals are way behind the market. Before you get an e-mail alert, you’re behind the field. Buying agents will have seen the property, as will the proactive buyers who haven’t relied on the portals for their intelligence. And some properties won’t ever find their way onto the portals at all, their buyers preferring to keep a low profile and only show their properties to selected buyers.

There are many advantages to the portals. Some will tell you how long the property’s been on the market, some will tell you whether the price has been reduced, and there’s plenty of historical information and comparisons that you can delve into that will help you build up a picture of the local market. You can also establish which estate agents operate in a particular area.

But remember, portal research is only the tip of the iceberg when it comes to property search. It doesn’t replace traditional methods, and if you’re serious about buying, you will need to have good relationships with all the agents in the area. Or by using a search agent you can be sure you won’t miss anything, and you’ll also get to hear about property before it comes onto the market, or property that is never advertised in the press or on the portals.

So if you’re serious about buying, get off the computer, onto the phone and into the car. Finding and buying is rarely a speedy process, but real time research will pay dividends

http://www.propertyreporter.co.uk/property/how-long-does-it-really-take-to-buy-a-house.html?utm_source=Email+Campaign&utm_medium=email&utm_campaign=21136-205896-Campaign+-+09%2F05%2F2017+SHAW

How to unlock the buy-to-let maze

A new six-part online programme goes live this Sunday, to help current and future landlords purchase and run a successful buy to let property.

The ‘Buy to Let Show’ has been devised by leading property expert Kate Faulkner, who runs www.propertychecklists.co.uk, one of the UK’s education and information residential property website, and delivered in partnership with Direct Line for Business. The series includes six 25-minute programmes and features case studies and vital information from industry experts, with the first programme being aired on Sunday, 7th May, at 11am.

There are now more than two million landlords in the UK, plus many people considering property as an investment so, for maximum coverage, the show will be broadcast online via Direct Line for Business and be promoted via other sites such as Landlordzone, Property Reporter, Property Tribes, Nethouseprices and, of course, Propertychecklists.co.uk.

With tax changes potentially hitting landlords hard, an ever-increasing list of rules and regulations and the introduction of tougher fines for those who fail to follow them, the Buy to Let Show couldn’t come at a better time.

Christina Dimitrov, Business Manager at Direct Line for Business, said: “Landlords have a tough time trying to keep up with latest trends in bu to let investment and also ensuring they are compliant with the law. We have supported the new Buy to Let Show to help landlords understand how to maximise their buy to let investment returns and deliver legally and safely let properties to their tenants.”

The six episodes of The Buy to Let Show cover the key areas of purchasing, letting and, importantly, exiting a property investment. The episode titles are:

• Is Buy to Let a Wise Investment?

• Financing and Insuring a Buy to Let

• Choosing a Buy to Let

• Letting a Rental Property Legally and Safely

• Dealing with Tenancy Problems During a Buy to Let

• How to Plan an Exit from Buy to Let.

Each show is split into three sections, with an introduction from show presenter Kate Faulkner on the main topic, landlord case studies and expert interviews followed by a panel discussion.

Kate said: “In my experience, buy to let is not often explained to people properly and, as a result, although some are successful, others are failing and not making any money at all – or, worse, have even lost their own home.

There are now more than 160 laws which landlords need to abide by; many are health and safety regulations which most existing landlords don’t understand. It’s clear that help is needed so the Buy to Let Show will be an invaluable resource for existing landlords and anyone thinking that investing in property is how they want to make their money or save for a pension in the future.”

Kate has spent years learning how people carry out property projects and knows the key mistakes they make. She currently helps people via www.propertychecklists.co.uk through property price and rental reports, easy-to-read checklists and eBooks. Now, the Buy to Let Show provides the ultimate education and information opportunity, thanks to the support from Direct Line for Business.

You can watch the show from Sunday, 7th May, at 11am, on directlineforbusiness.co.uk, Landlordzone, PropertyTribes, Nethouseprices, Property Reporter and, http://www.propertychecklists.co.uk/articles/the-buy-to-let-show.

 

 

http://www.propertyreporter.co.uk/landlords/new-programme-to-unlock-the-buy-to-let-maze.html?utm_source=Email+Campaign&utm_medium=email&utm_campaign=21136-205065-Campaign+-+04%2F05%2F2017+EASY

Landlords warned over bad mortgage brokers

Buy-to-let landlords may not be getting the best mortgage deal, or they could find themselves locked into mortgages with high standard variable rates, as a result of mortgage deals set up by bad brokers.

According to The Mortgage Broker Ltd,  some landlords are missing out on good mortgage deals because they are working with unprofessional brokers, who are lazy and only use lenders that they are familiar with, rather than searching for the best deal for the landlord.

In the worst case scenario, bad brokers can be outright fraudulent – lying about income, or other aspects relating to the applicant.

Darren Pescod, MD of The Mortgage Broker Ltd comments: “We have seen evidence of mortgage brokers securing mortgages for investment properties, which are then inhabited by family members.  Or they have arranged a mortgage for an investment property, that is either a multi-let, Airbnb or student accommodation, without informing the lender.

This is highly unprofessional. If a lender finds out, it could withdraw the mortgage and in a worst case scenario, the client could be slapped with mortgage fraud, which will severely affect their ability to borrow funds, or obtain mortgages in the future.

Some landlords don’t understand the severity of a little white lie to the lender, or understand the implications of not divulging their full intentions with the property, or their personal situation. Lenders are more geared up now to do post application checks and are on the lookout for scheme abuse and mortgage fraud.

If landlords are working with bad brokers they don’t need to feel trapped.  They can often make changes to their mortgage arrangements with the help of a reputable, experienced and professional broker.

There are some great buy-to-let mortgage deals around at the moment, such as lenders still willing to offer a mortgage at 125% of the pay rate, rather than the recent increase in rental calculations, made my most lenders.”

http://www.propertyreporter.co.uk/landlords/landlords-warned-over-bad-mortgage-brokers.html?utm_source=Email+Campaign&utm_medium=email&utm_campaign=21136-201922-Campaign+-+11%2F04%2F2017+SHAW

Landlord tax changes: Are you about to be pushed up a tax bracket?

The most significant change to the way that landlords with borrowings are being taxed is introduced today. Here’s what you need to know.

Who is affected?

The changes will affect all landlords with finance costs associated with letting their properties, although in this blog we refer primarily to mortgage interest costs, because buy-to-let borrowing is the most prevalent source of finance in the sector.

What’s changing?

You’ve probably heard by now, but when calculating your taxable profit your ability to deduct finance costs from your rental income/ turnover is being phased out over the next 4 years. Instead you will be able to claim just 20 per cent of your finance costs as a tax reduction.

What are the exact details?

To fully grasp what will be changing we first need to understand the difference between:

Tax deductions – legitimate business costs that are deducted from your rental income before you declare your taxable profit.

Tax reductions – reductions to your tax bill after your taxable income, and therefore profit, has been calculated.

Here goes….

Until today (6 April 2017) you were able to deduct your mortgage interest costs from your rental income before declaring your profit to the taxman. But by the time we reach the 2020-21 tax year you will no longer be able to do this. Instead, you will receive a tax reduction to your final tax bill, the equivalent of 20% of your mortgage interest costs – regardless whether you are a higher rate tax payer.

Are the changes immediate? 

The changes aren’t being introduced immediately, and will be phased in over the course of the next 4 years…

  • Year 1: Current financial year (2017-18): This year you can deduct 75% of your mortgage interest costs from your rental income before declaring your taxable profit. The remaining 25% of your mortgage interest will then be used to calculate a tax reduction (equivalent to the basic rate of Income Tax of 20%) which is then applied to your final tax bill.
  • Year 2: 2018-19: Next year, the split will be 50% deduction and a 50% reduction.
  • Year 3: 2019-20: In year three the split will be 25% deduction and a 75% reduction.
  • Year 4: 2020-21:…until finally, by year 4 you will no longer be able to deduct any of your mortgage interest costs and receive only the tax reduction.

What’s the take away message?

Your mortgage interest costs are no longer deductible and will count towards your taxable income.

The NLA predicts that almost half a million landlords who currently pay the basic rate of tax will be forced into a higher tax bracket as a result.

Is there a way around the changes?

Yes, but only if you own your properties as part of a limited company, in which case you will continue to pay corporation tax on your profits alone. However, transferring personally held properties into a company incurs potentially both capital gains and stamp duty charges, which will price the process out of most landlords’ financial capabilities.

We estimate that a ‘typical’ landlord with only one or two properties and fairly standard gearing would take in excess of 8 years to recoup the cost of incorporation. Hardly worthwhile for the majority.

What are my options?

There are a few options for landlords who will be hit by the changes:

  1. Incorporate: as above, many landlords have taken this action already, but sadly the costs involved mean it isn’t an option for everyone.
  2. Raise rents: faced with an increasing expense of providing housing many will have to raise rents in order to cover costs.
  3. Sell up: Many landlords will not be able to absorb the increased costs and will need to sell. There’s already evidence of this happening.

What is the NLA doing about it?

To date the NLA has, and continues to, lobby government over the changes, but while they are willing to listen to our arguments, they have yet to be convinced.

In order to provide a more compelling evidence base we have commissioned a large scale research project to outline the impact of the changes on the sector, and we’ll be sharing the findings with landlords and the Government in due course. NLA members can read more about this in the May / June edition of UK Landlord magazine.

The NLA also donated £10,000 to the (eventually unsuccessful) Judicial Review to fight the case at the High Court, and we remain, with other industry stakeholders, part of the Tenant Tax Coalition raising awareness on the matter.

What should I do?

If you are yet to do so, our advice is to crunch the numbers as soon as possible in order to assess whether you will be affected by the changes.

We also provide a list of trusted and vetted tax and accountancy specialist services through our Recognised Supplier scheme, including bespoke tax software from GoSimple Tax, which helps to calculate and submit your tax return directly to HMRC, even if you are not an expert. NLA Members receive a 50% discount.

 

 

Landlord tax changes: Are you about to be pushed up a tax bracket?