The tax “bombshell” as it’s been called, to mix metaphors has hit landlords like a “ton of bricks”; it came out of the blue after the election success of the Tories at the election last May, and of course no-one expected such a blow from the Conservative minister, George Osborne.
In truth the move was probably forced on him in combination with the Bank of England and Governor Mark Carney’s concerns about rising house prices and the amount of buy-to-let loans underwritten by the banks.
It’s a sea change in the fortunes of buy-to-let, and coupled with the government’s policy of growing home ownership and encouraging institutional investment in rental property, it’s going to be a challenge for buy-to-let landlords. On the other hand the majority of small-scale landlords are not overly committed on borrowed funds, and many have no mortgage at all, plus institutional investment in residential lettings is a mere 2% of the market right now.
This timely publication by Britain’s leading property tax expert is about as good as it gets on information about the changes as far as mortgage interest relief for landlords goes. No matter what you have read already, if you want a comprehensive understanding of the changes, its effects, and what you can do about it, you should invest in this guide.
From April 2017 tax relief and financing costs paid by all residential landlords is to be phased out gradually over four years. Instead, there will be a 20% “tax credit” that can be applied as a tax reduction. The computation is rather complicated.
It means that for those on the higher tax bands, 40 & 45%, they will no longer get their full tax relief on borrowing costs and for those with high levels of borrowing, this has serious implications for the profitability of their buy-to-let business.
The guide explains in detail how the tax relief restriction will operate, how it will affect landlords with various types of exposure and what you can do to protect yourself in the period before the changes come in. You have a four-year period until the full relief is removed to do something about it.
Following a brief overview of why the authors think the government is bringing these changes in, there is an analysis of various types of investor and how each one in turn will be at risk. The next section explains the complexities of the new scheme in plain English.
Chapters 6 and 7 go on to examine case studies which show how different landlords will be affected; as it explains, some landlords will be hardly affected, while others are at risk of losing a considerable amount of income.
Chapters 8 to 20 – each chapter is quite concise and easily digestible in a matter of 15 minutes or so – looks at tax planning and how landlords can go about beating these tax increases.
Personally, having read much over the last few months about this, I find the guide refreshingly straightforward; a real help to understand the complexities of this change and how it will affect landlords.
If you are affected by this change, and many landlords will be, I recommend you read this before you speak with your accountant, and certainly before you make any changes to your lettings business.
Tom Entwistle, Editor