1 in 5 landlords still confused over BTL tax relief changes

1 in 5 landlords still confused over BTL tax relief changes
20% of landlords have said that they are most likely to increase rents to help mitigate the cost of their new tax bill

With the long-awaited changes to mortgage interest rate relief coming into force last week, online letting agent Upad.co.uk has revealed that almost 20% of its landlords are unaware, or only vaguely aware, of the increase in tax that they will now have to pay on their rental properties.

Almost half of Upad’s landlords (47%) don’t know how much more tax they will be paying by 2020, when the new system comes into full force.

The changes mean that landlords must now pay tax on turnover, rather than the difference between rental income and mortgage interest. Currently tax is due on profits at a landlord’s highest rate of income tax, but between April 2017 and 2020 this system will be replaced and all landlords will pay tax on the full amount less tax relief fixed at 20%.

With the majority (60%) of Upad’s landlords owning less than four buy-to-let properties and most of these with a mortgage, it seems that landlords who pay 40% or 45% tax will be hardest hit, but so will some basic-rate taxpayers, because the change will push many into the higher-rate tax bracket. However, very wealthy landlords who do not need mortgages are unaffected.

Anne Wright, aged 55, an IT Manager for the NHS from Bristol, who owns a buy-to-let property in Bath after she accidentally found herself as a landlord, comments on the changes: “After I got divorced, I bought my flat in Bath and relocated there for 18 months before starting a new relationship and moving to Bristol. The property is my first buy-to-let and up until now, has been a good buy. I have always found it easy to let and the income it has provided has been enough to cover the mortgage, plus top up my salary.

Anne continues: “I haven’t considered how much the changes to mortgage interest rate relief are going to affect me but as a basic rate tax payer currently, I am concerned that I will end up in the higher-rate tax bracket because I own this property. The government seems to think of all landlords as being professionals with huge portfolios of property and super yachts, but there are lots of people like me, who have just one flat that have ended up with it by circumstance, rather than the intention of making lots of money, who are going to be unfairly penalised by this new tax system.”

The research also revealed that 20% of landlords have said that they are most likely to increase rents to help mitigate the cost of their new tax bill, meaning tenants could face a permanent increase in rent as a direct result of the changes.

James Davis, CEO and founder of Upad.co.uk, commented: “Higher tax will mean lower profits for many landlords, which is why some are warning that rents will have to rise this year. However, rent rises are likely to be deeply unpopular with tenants so landlords will need to think about adding some cost-effective, tax deductible improvements to their properties that justify asking for an increase. For instance, by providing complimentary Wi-Fi, upgrading the appliances or giving the kitchen or bathroom a makeover.”

Only 5% of landlords have plans to sell their buy-to-lets, despite the barrage of charges inflicted on landlords over the last year.

Adam Corcos, aged 53, who owns three flats in London, which he rents out and who classes himself as a professional landlord, comments: “I am still not a hundred percent certain as to how to mitigate the changes to mortgage interest rate relief in my specific case, but I am currently assessing different courses of action. At present, this is my main source of income and will provide my pension too, so it is concerning that my future could be impacted by yet another penalty set against landlords by the government. However, I would be prepared to sell one or two of the properties in London if I need to. I hope to be able to ride it out and continue in the buy-to-let market though."

James Davis continues: “For landlords that are affected by this month’s tax changes but yet to do anything about it, there is still time to look at ways of reducing your costs and increasing your revenue. You may need to sell off some low-yielding property, reduce some of your mortgage payments or change the ownership of your portfolio to protect the profitability of your business. Options include setting up a company to buy property or if you already own a rental property as a private individual, you could transfer it to a limited company.”

James continues: “If you’re a higher rate or additional rate tax payer, or these changes risk tipping you into the higher tax bracket, and you own the property with a lower rate tax payer, you can transfer more of the rent to them to limit your overall tax bill. Another option could be to switch to fully furnished holiday lettings as these are exempt from the tax changes so you can still claim full mortgage interest tax relief.”

Landlords have been hit hard in the last year with the 3% stamp duty surcharge and the ban on tenant fees in 2016. According to Upad’s latest research, over 60% of their landlords got into the property market because of the investment opportunity and to add to a pension, however for many, this is now in jeopardy.

William Rutherford, 66, a surveyor from Weybridge in Surrey who owns six buy-to-let properties across West London and Surrey, which he intends to sell a couple of when he retires in order to boost his pension, comments: “When I decided to start investing in buy-to-let in the 1990’s, it seemed like the most sensible place for my money. However, now I think I will inevitably end up paying more tax when the changes to mortgage interest rate relief come into full force. When I retire, I will sell a few of my properties off so that I have a tighter portfolio and can manage without a mortgage.”

James finishes: “Landlords should also look at ways to negotiate with their letting agent and be vigilant to agents trying to increase their commission or other fees, as they look to flesh out their profits following the ban on tenancy fees. Landlords can minimise the impact of the upcoming tax changes through saving money spent on advertising and tenancy set-up by using an online letting agent like ourselves.”

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  1. Tony GimpleTony Gimple14 April 2017 10:52:49

    I'm not at all surprised that so many landlords are still confused about what the tax changes really mean and how it will affect them. In particular, the blind rush to incorporation is leaving landlords far worse off, as we've yet to come across a single adviser who is telling landlords everything they really need to know before making a decision. For example, have they been told that, transferring their property portfolio into a limited company simply to offset the S24 reduction in mortgage interest relief rules has many disadvantages such as: - • Liability to capital gains tax and stamp duty if you can’t prove your entitlement to S162 incorporation relief (you must be working 19-hours a week or more in the business or pull the wool over HMRC’s eyes via a temporary LLP). • Upfront remortgage costs such as early redemption charges, brokers fees, lenders fees, and legal fees. • Most lenders won’t lend to limited companies, and none are keen on so called ‘beneficial interest company trusts’ as they fundamentally weaken their ability to pursue the debt. • Significantly reduced choice of lenders and higher interest rates. • Lenders will mostly require a personal guarantee (if the company goes bust you remain responsible for the debt). • Lenders will take a debenture (legal charge) over the company’s balance sheet, which restricts your ability to make best use of your director’s loan account if at all. • You’re tied in to the first lender and their appetite for further lending if any, meaning that each new acquisition or remortgage may need a new lender and a new company. • A limited company is fully visible to HMRC and subject to corporation tax, dividend tax, income tax, and national insurance. • It’s almost impossible to mitigate inheritance tax (40%) without expensive (at every stage) and ultimately uncertain ‘opinion-based’ trusts, meaning that your heirs may have to break up your hard work just to pay the tax bill.

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