Changes to tax relief for residential Landlords

A reminder that buy-to-let tax change have come into force this month affecting mortgage interest payments. In the past, landlords could offset these payments against their rental income before making their final tax calculation. From this month, this relief will be phased out, potentially resulting in higher tax bills. Those bills will increase even if landlords’ rental income has remained static.

The first phase of the process has already begun, with landlords now only able to offset 75 per cent, rather than the full 100 per cent, of their mortgage interest payments. This phasing will continue until 2020, by which point landlords won’t be able to offset any of their mortgage interest payments.

Once rental income has been taken into account in tax calculations, the change will push some basic rate taxpayers into the higher banding.

The main question that our Landlords are asking us is, what can they do to mitigate their losses? Firstly, it is important to understand that the change only affects landlords who hold their properties privately, rather than through limited companies.

Many landlords have started to consider moving their properties into something termed a “beneficial interest company trust”, which some financial advisors said could help them reduce the impact of the changes. According to the firms promoting these services, properties could be moved into limited companies without the need to remortgage, by transferring only the beneficial interest and retaining the mortgage in the landlord’s name.

The deal seemed attractive, because income would be taxed at the corporation tax rate, rather than the income tax rate. However, accountants and professional advisors have warned that there are significant risks associated with such a move, with HMRC on the lookout for signs that it is being done purely for tax purposes.

Other landlords have chosen to move their properties into more standard company structures to benefit from the lower corporation tax rate. There are still risks, though, primarily because this would require remortgaging, meaning that borrowers may lose out on existing cheap deals that they had previously secured as well as additional stamp duty.

Other ways you as landlords may be able to at least minimise the impact of the changes include; speaking to your agent to ensure that you are achieving the best possible price for your property and speaking to one of our financial advisors to ensure you have the best mortgage in place.

If you have any queries regarding these changes and how they will affect you, please do hesitate in contacting your local branch where our staff will be able to assist you with this. More information can also be found at https://www.gov.uk/government/news/changes-to-tax-relief-for-residential-landlords

Neil Newstead, FARLA MNAEA
Chief Executive Officer

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