Mortgage Interest Tax Relief Changes for Landlords
Advice for Individuals and Ltd. Companies
If you don’t own more than one property the changes to the landlord’s tax relief may have completely passed you by, but for those individuals that have just a handful of rental properties, profits are crashing before their eyes. The 2017-18 tax year will be the first in which a change is made to the tax relief system; instead of deducting all mortgage interest payments before calculating the tax, people can now only get tax relief on 75 per cent of that interest. A 20 per cent tax credit for basic rate tax payers will be received on the rest of mortgage payments.
Year-on-year the relief drops to 50, then 25 then zero per cent, meaning property investors are being taxed on their overall turnover and not just the profits. By the time the 31 January 2022 filing deadline comes round, only the tax credit for mortgage interest will be applied. Having an interest only mortgage, which generally increased landlords’ income, is not particularly effective anymore and people who have a small portfolio, who maybe weren’t seeing much profit anyway, are selling up.
Hitting pockets hard
While on the one hand, people have four years to adjust to the new system fully replacing the old one, on the other, some are finding the legislation severe. The tax credit applied will only at the basic rate of tax for basic rate taxpayers and higher-rate taxpayers can only enjoy a credit of approximately half that; currently the basic rate is 20 per cent for earnings above £11,851, 45 per cent above £46,351 and 45 per cent above £150,000. The punishment doesn’t stop there though, as by being forced to declare a higher income, some are pushed into the higher or additional bracket of tax.
Are people still buying for letting purposes?
For many investors, buying properties to rent out has become less gainful and buy-to-let investment fell by 80 per cent between 2015 and 2017 according to the Intermediary Mortgage Lenders Association. However, one could argue the sector is still very much buoyant as those with large portfolios can often make cash purchases. Also, a demographic that could benefit from the changes are the ‘silver landlords’ who buy properties to rent with their pensions while enjoying their later years.
There are still profits to be made by purchasing and letting properties, but there are a number of considerations:
> Higher mortgage expenses – potential looming increases in the Bank of England base rate and the closure of the Funding for Lending and Term Funding schemes could mean more expensive mortgages.
> Lending regulations – when looking for a lender to purchase a buy-to-let, people who already have four or more mortgaged properties now face tighter restrictions, as the Bank of England’s Prudential Regulation Authority ordered banks to carry out tougher affordability checks.
> Landlord licensing – some local councils require landlords to hold a licence. East Staffordshire, Coventry and Nottingham are the closest councils to our offices here in Tamworth that have brought in such a scheme. This article from Which details a UK map and more information about the three licence types; mandatory, additional and selective.
> Energy efficiency changes – a minimum EPC rating of E is now required on new tenancies and renewals, and on existing tenancies from 2020. Cumulative fines of up to £5,000 will be handed out upon failure to meet the legislation.
I own and rent properties – what should I do?
If you can see thousands of pounds of potential profits going up in smoke, you may wish to consider setting up a limited company, but it’s not right for everyone’s circumstances and it might only be cost-effective for the medium to long term.
Whether it’s Adams Moore or another firm, do take professional advice from an accountant on whether it’s beneficial for you to set up a limited company for your property rental business.
Countrywide reported that at the start of 2017, a record high of 20 per cent of landlords were limited companies and Kent Reliance saw buy-to-let mortgage applications from firms rise from 45 to 70 per cent between 2016 and the first nine months of 2017. With this increase, likely derived from those seeking to counter changes to landlord’s tax relief, the mortgage market is responding. There are vast amount of mortgage products available to limited companies now, rising from just 17 in April 2013, to 80 in 2016, to 212 the year after and to 235 in April of this year.
While a mortgage’s interest can be still deducted for relief on a company’s corporation tax, there are disadvantages that must be weighed against the potential tax savings:
> higher mortgage rates for limited companies
> new mortgages are required for current portfolio under the limited company’s name
> corporation tax still must be paid on profits
> additional stamp duty surcharges and capital gains tax bills as you essentially must sell the property to the ltd company
> additional 3 per cent stamp duty surcharges on buy-to-let
> associated fees with switching mortgage
> solicitor’s fees
If incorporating isn’t the best route for you, there are some other options for you to offset your loss in profits:
> Increase rents, being careful not to price the property out of the market and then lose money holding an empty house
> Look for shorter-term fixed rate mortgage deals for low interest, but these come with greater risk
> Transfer property ownership to your spouse but ensure the income doesn’t push them into the higher rate of tax
You may find this recent article about changing from sole trader to a limited company useful, but please contact us if you would like to take advantage of the free consultation we offer to new clients and we’ll get to know more about you and your property business.