We are now almost two months into the Government’s rolling out Section 24, the new buy-to-let tax changes affecting landlords’ ability to offset all their income against tax.
Online letting agent Upad has moved to state that landlords will see an average 13% increase in their taxable profit from tax years 2017/18 to 2018/19.
The tax changes, which begun the phasing in process on 6th April 2017, permit landlords to pay tax on their turnover, rather than the difference between rental income and mortgage interest.
Until this date, landlords could fully deduct their mortgage interest payments on their rental properties before any tax was paid. Now however, mortgage, loan and overdraft interest values can no longer be considered when calculating taxable rental income.
These alterations are to be phased in during the next four years, when by 2020, 100% of buy-to-let finance costs will be restricted to the basic rate of tax at only 20%.
Research from Upad reveals that 20% of landlords will increase their rents in order to mitigate costs of the new legislation. This means that tenants could face a permanent increase in rent as a result of the changes.
Out of Pocket
James Davis, CEO and founder of Upad.co.uk, observed: ‘Despite the changes being gradually introduced over the next four years, our latest research shows already how out of pocket landlords are set to be by 2018/19 alone, as they see a big rise in their tax bills and a substantial hit to their profits. Those who are in the higher rate tax bracket of 40% will be the worst affected but others could find themselves being tipped into the higher tax bracket despite their income not having increased, which will leave many renting at a loss and subsidising their property every month.’
‘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,’ he continued.
Mr Davis went on to acknowledge: ‘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. Alternatively, if 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 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,’ he concluded.