Shockingly, a recent survey by a landlord referencing website states that 1.4 million landlords are completely unaware of the mortgage interest tax relief changes due to take effect from 1st April 2017. These tax changes mean many landlords will see a strong downturn in their rental income over the next four years as the tax changes are phased in and it is essential landlords start planning for this now.
Around 8.2 million people in England alone will be affected as they let residential property as an individual, partnership or trust. Last year the main campaign against the measure (which has the support of ARLA, the NLA, RLA and the Scottish Association of Landlords) lost a bid to trigger a judicial review of these changes, first announced in George Osborne’s post-election Budget of 2015.
The restriction in the relief will be phased in as follows;
- In 2017/18, the deduction from property income will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction
- In 2018/19, this will change to 50% finance costs deduction and 50% given as a basic rate tax reduction
- In 2019/20, there will be a 25% finance costs deduction and 75% given as a basic rate tax reduction
- Finally by 2020/21, all financing costs incurred by a landlord will be given as a basic rate tax reduction.
This can be illustrated by looking at the impact on a 40% taxpayer who owns a single buy-to-let property:
|
|
2016/17 |
2020/21 |
|
Gross rents received |
£8,000 |
£8,000 |
|
Less: Repairs and other allowable expenses |
£1,300 |
£1,300 |
|
Less: Interest paid on mortgage |
£2,700 |
£ - |
|
Net rental profit |
£4,000 |
£6,700 |
|
Income tax @ 40% |
£1,600 |
£2,680 |
|
Less: Interest relief (20% x 2,700) |
£ - |
£540 |
|
Net income tax liability |
£1,600 |
£2,140 |
|
Buy to let profit |
£2,400 |
£1,860 |
In the above example, the reduction in profit of £540 is due to the 40% taxpayer no longer being able to benefit from a full write off of loan interest and only being able to claim a 20% tax credit.
Along with restricting mortgage costs, the Government also plans to restrict other finance costs such as fees incurred when taking out or repaying mortgages or loans. So, what can you do about this now? Here are some basic steps to limit this loss to your income from rents received;
1. Rent reviews – a good letting agent will regularly issue rent increases across their portfolio of properties to ensure they are in line with the current market. If you are a CGT landlord, you will be used to us contacting you periodically regarding a small increase in your rent, although there is a risk to aggravating a good tenant, a small increase is understandable as- long as it is in line with market value. You can only increase the rent every 12 months if your tenant is in a periodic tenancy through a Section 13 notice, however there is also the option of negotiating a rent increase in a renewal fixed term agreement with your tenant setting the rent as slightly higher for a guaranteed fixed term period. Your agent should be able to assist you with both of these steps.
2. Speak to us – as specialist Letting Agents, we have expert knowledge on the best things to do to offset these changes and ensure your yield still remains steady regardless of these changes. Get in contact with your local branch to discuss this further.
3. Minimise void periods – although it is pretty essential there are a few days between lets in order to conduct any cleaning or repairs required, your agent should be keeping your void period to an absolute minimum to ensure you are receiving a steady stream of income and your responsibility for utility bills remains low. If your agent isn’t able to find you a tenant during the month notice your tenants have to give, consider finding a different agent or discuss with them why your property is sticking.
4. Maintenance and repairs - Any money you spend keeping the property in a good state of repair is tax deductible. While you cannot claim for renovations, extensions or improvements that add value to the property, you can offset expenses to correct wear and tear. Property repairs can include mending broken windows and doors, repairing broken cookers, white goods, furniture or guttering, painting and decorating and replacing or fixing the roof.
5. Consider re-mortgaging – although carrying more risk, if as a buy-to-let landlord you are paying 5% on a typical £120,000 mortgage, you might currently be earning rental income of £750 per month or £9,000 annually. After allowing for expenses, agents' fees and mortgage interest you could be left with a £612 annual profit after tax. However, when tax relief is reduced to 20% that profit turns into an annual loss of £588. By re-mortgaging at, perhaps, 3.79% with a five-year fixed-rate loan, you could save £1,452 annually on your interest bill, turning that annual loss back into a profit of £574. Without re-mortgaging, your bottom line could deteriorate further as interest rates rise. Should buy-to-let loan rates reach 7% by the time that higher-rate tax relief has completely disappeared in 2020, you could be looking at an annual loss of £2,784. Buy-to-let landlords are likely to increasingly seek to peg their losses by fixing their rates longer where possible.
As always, get in touch to discuss more ways we can help you prepare for these changes.
Angharad Trueman – Operations Manager