This week’s taxation changes may make landlords worse off - What can you do to limit the damage?

This week’s taxation changes may make landlords worse off - What can you do to limit the damage?

One of the most controversial landlord taxation changes in recent times - the changes to treatment of mortgage interest and finance costs – is due to kick in this Thursday.  Residential landlords have always been able to deduct the cost of interest paid on mortgage loans when calculating their annual rental profit – which means they received tax relief at their marginal tax rate, giving higher rate taxpayers 45% tax relief.  But this will now change - the changes being phased in over four years.  This will significantly increase the tax liability for some landlords.  Landlords who have borrowed heavily to finance their investment could see their modest profit turned into a net loss.

For instance, if a landlord has rental income of £20,000, repairs/insurance/prof fees of £5,000 and mortgage interest of £10,000 then under the old rules his profit would have been £5,000.  But once the new rules are fully phased in, the profit will be deemed to be £15,000.  Under the new rules, this profit will be taxed at the landlord’s income tax rate, but relief can be claimed at the basic rate of income tax (currently 20%)

It is commonly thought that this only affects higher rate taxpayers but it could also affect those who were previously basic rate taxpayers, but who may come to find themselves in the higher rate due to the change in the way rental profits are determined.

Landlords are also facing a change to the way they pay tax when they sell their buy-to-let properties.  At present capital gains tax isn’t due to be paid until the end of the tax year.  But from April 2019 landlords will have to pay their capital gains bill within 30 days of selling a property.


So, what can landlords do to mitigate their position? 

We are not financial advisors, but here are a few things to consider:

1. Speak to a mortgage advisor to see what scope there is to reduce the cost of borrowing.  There are some good deals around and with interest rates set to rise in the medium term such a move could be a game saver.

2. It is also worth considering whether to form a company to hold ownership of your let property.   Companies are not currently affected by the change to individual tax relief on borrowings and can still offset borrowing costs against the corporation tax payable on rental income.   On top of that the rate of corporation tax is now reduced to 19% and will further reduce to 17% in 2020.  Company directors take income in the form of dividends and each director can receive £5,000 annually tax free.   On larger sums dividends paid to higher-rate taxpayers are reduced by 32.5pc, while basic-rate taxpayers pay a 7.5pc dividend tax.  A company structure can also provide an excellent mechanism for transferring value to grown up children.

3. Landlords should also explore the possibility of utilising any unused allowance to which their husband or wife may be entitled by structuring matters so that part of the rental income flows to their partner.

Much will depend on an individual’s personal circumstances and, as always where tax and investment is concerned, it’s vital to take advice from a specialist tax advisor.