The big focus for most landlords recently has been the Stamp Duty changes that will come into place from April 1st. However, the tax change being put in to place in 2017 that could have a much larger affect on landlords in the UK.
From April 2017, the government has announced that landlords will no longer be able to offset mortgage interest against their tax bill. To help, we decided to provide an overview of the changes and what your options are.
The change coming in 2017 Under the current regulations landlords can claim tax relief on their mortgage interest payments at their marginal rate of tax. This means that a basic rate taxpayer would receive a 20% tax relief, those at a higher rate would receive 40% relief and top-rate taxpayers could claim 45%.
From April 2017, landlords will no longer be able to offset mortgage interest against their tax bill. This means that when the change is put into action, the tax relief will be at a flat rate of 20%., effectively halving the relief and reducing profits for landlords paying above basic rate taxes. Those who pay a basic rate tax will see no change.
The affects of the change The Nationwide Building Society has provided an example of the potential result of this change for the typical landlord.
A landlord with a £150k buy-to-let mortgage on a property worth £200k with a monthly rent of £800, would have an annual net profit of roughly £2,160. Once the new system in in place, this net profit would fall to £960.
This is a quite a considerable drop in profits for most landlords and will leave many considering their options and whether to continue to invest in the buy to let market.
The options There are a few things you can try if you feel you will that your profits will be affected by the change.
The first of these options is to place your portfolio in a limited company structure. This allows you to pay corporation tax instead of income tax which is a lower tax rate.
Another option is to change to a short-term fixed rate deal for a lower rate of interest. However, these mortgages do come with more risk.
A third option is transferring the ownership of your properties to a spouse currently paying a lower tax rate. You must be careful that this transfer of ownership does not push your spouse into a higher tax bracket.
What we recommend With all of these changes affecting the market, it’s best to ensure you’ve got all the information you need to manage your investments efficiently. If you’re looking for assistance with the day to day management of your properties then you should get in touch. Whether you want to put your feet up or be hands on at all times, we can provide a service tailored to your needs. Call us on 01284 769598
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