Private Landlords Warned as new Tax Rules Start to Bite

11th October 2017

Private Landlords Warned as new Tax Rules Start to Bite

Private landlords need to fully understand the implications of a “triple whammy” of tax changes before drawing up their business plans on buy to let property in Coventry and Warwickshire, warns leading estate agent Loveitts.

At a time when buy-to-let investors are being attracted to property due to the high yields achievable on properties in Coventry and Warwickshire and increasing rents, Loveitts are available to offer any assistance to would be landlords or indeed existing landlords who are unsure of legislation being brought in by the government.

Paul Barnes, Director of Loveitts, said: “Property has in recent years become a very attractive proposition for people looking to invest and in our eyes still is, with some very good returns on investment available. But we are also mindful of the changes that have taken place recently that some landlords will not be aware of.

“There have been significant changes around the tax regimes for buy-to-let in the last two years and the most profound – the abolition of tax relief on mortgage payments – is yet to be fully felt.

“Until April this year, mortgage payments were an allowable expense that was deducted from income for tax purposes and by 2020 this will have been abolished altogether.

“By then landlords will be facing tax rises of thousands of pounds a year, and in some cases, depending upon their individual income, the changes will push them into a higher tax bracket, magnifying the effect.

“There are many strategies landlords can adopt to attempt to limit the damage, such as starting up limited companies, transferring property to a spouse or making additional pension contributions.

“However, it all depends on individual circumstances and prospective landlords ought to seek professional advice before making a decision. There are good returns to be made, but they need to go in with their eyes open.”

Those intending to purchase buy-to-let properties are already facing a three per cent surcharge on stamp duty – which would see the bill for a £200,000 property come in at £7,500 compared to £1,500 if it was the buyer’s only home.

Tax allowances for wear and tear in rental properties have also been tightened up, with the automatic 10% allowance being replaced with a more detailed system that only allows landlords to claim for actual expenses paid out.

However, for many private landlords the greatest impact will come from ending the practice in which mortgage repayments were considered as an allowable expense to offset against tax. The controversial changes came into force in April 2017 and are being phased in over the next four years.

For example, under the old rules, someone with a buy-to-let that each year brought in £44,460 rental income, and cost £24,470 in mortgage interest payments and another £7,080 in non-interest expenses, would be deemed to have made a rental profit of £12,910 for tax purposes.

In contrast, under the full force of the new rules, the mortgage interest payments would not be deducted, leaving the rental profit as £37,380 a year – three times as high. The exact amount of tax paid will depend upon the landlord’s individual overall income but will be significantly higher under the new rules.

The new rules do not apply to furnished holiday lets, commercial lettings businesses, or those with property in a limited company. However, they will affect partnerships and limited liability partnerships.

Other finance costs relating to buy-to-let, including mortgage arrangement fees, broker fees and similar costs, are also no longer allowable against tax.