These are not happy times if you are a buy-to-let landlord!
First a tax relief slash and then an added extra stamp duty.
All of a sudden your property portfolio may not look so rosy. In two successive blows which no one saw coming, the Government announced that tax relief on buy-to-let mortgage interest payments would be slashed (phased in from April 2017) and buy-to-let properties (and second homes) would incur an extra 3 per cent stamp duty.
Loss of tax relief – Impact!
If you’re new to buy-to-let, you might not appreciate what a shake-up this is. Till now, people buying to let have been able to claim tax relief on their mortgage interest payments at their marginal rate of tax which would be 20% for a basic rate taxpayer, 40% for a higher rate tax payer and 45% for a top-rate taxpayer.
The changes mean that the tax relief will be a flat rate of 20%. Landlords who pay basic rate tax would see no change, but those on higher incomes will find themselves losing much more in mortgage interest payments.
How severe could the impact be?
Estimated figures published by one Building Society show that someone with a £150,000 buy-to-let mortgage on a property worth £200,000, with a monthly rent of £800, would currently have a net profit of around £2,160 a year. Under the new system, the net profit would drop to £960.
Some other predictions have been even gloomier. The higher the mortgage interest you pay, the more impacted you will be.
What’s the answer?
Increasing your rents to compensate for the impact is unlikely to work, as most tenants are already paying as much as they can afford. If you think you might be affected, there are a few other things you can try:
- You could switch to shorter-term fixed rate deals to get lower rates of interest, although these mortgages carry more risk.
- You could place your property portfolio in a limited company structure. You would then pay corporation tax (which is lower) rather than income tax on your profits. A drawback is that your mortgage options will narrow as fewer providers will lend to a company.
- If your spouse pays a lower rate of tax, you could transfer ownership of one or more properties to them (taking care this does not lift them into a higher tax band).