Landlord tax changes: Are you about to be pushed up a tax bracket? - HAS Property Management

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?