Please Note: This Article is 3 years old. This increases the likelihood that some or all of it's content is now outdated.

The Chartered Institute of Taxation (CIOT) is reminding landlords of residential properties that the first phase of the restriction of tax relief they get for mortgage interest to the basic rate of income tax begins on the 6th of April. Three further phases over the next three years will gradually reduce the relief allowed.

The change means that finance costs such as mortgage interest and finance set-up costs will no longer be deductible in full when working out taxable property profits. All individual residential landlords with finance costs will be affected, but it has been estimated that the measure will have minimal impact on the around 50% of small-scale landlords, these with little or no mortgage finance.

However, higher rate tax payers, and some on the border line who may be pushed into a higher rate tax band, simply because their rental income is added to their other income, will pay more tax. Unlike the old system where finance costs were deducted from rental income in calculating taxable rental profit, now no deduction is allowed, except for a tax credit amount on total income, which will be a maximum of 20% by 2021.

As landlords become more aware of the implications of these changes they will be considering their options. Some may be considering selling properties, paying down finance or incorporation, though the Chancellor’s words in the Budget on the latter are ominous: Mr Hammond’s exact words were:

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“We must ensure that our corporate tax regime does not encourage people across the economy to form companies simply to reduce tax liabilities, pushing the burden of financing our public services onto others. HMRC estimates that existing incorporations cost the public finances over £6 billion a year and the OBR forecast an additional annual cost to the Exchequer from those choosing to incorporate of £3.5 billion a year by 2021-22.” Read more here

Brian Slater, Chair of CIOT’s Property Taxes Sub-Committee, said:

“This is one of the most significant changes to the buy-to-let market in decades and will particularly affect heavily geared buy-to-let landlords. However, it is sensible for landlords to be cautious about making any knee-jerk moves in response to the changes.

“A decision to sell properties may be tempting for those that are highly geared, meaning they are carrying a lot of debt from perhaps buying many properties or a couple of expensive ones and can no longer benefit from the relief.

“Helpfully the change is being phased in over four tax years, so that the full effect of the restriction will not be felt until tax year 2020/21. This will give landlords extra time to consider their options.

“Taxpayers may have to decide whether to continue in buy-to-lets with reduced profits or simply sell their properties, which may impact on the number of houses and flats available to buy. Or such people could move into commercial property renting, but they will find that to be a more specialised field.

“The restrictions apply to individual landlords and not to companies, which will continue to receive relief for mortgage interest and other finance costs in the usual way. This means that the change may impact on the look of the rental landscape in the future if many individual landlords choose to incorporate and become companies, although this is not without difficulty and incorporation itself can involve tax charges; these may be stamp duty land tax on the market value of properties and possible capital gains tax on properties transferred into a company.”

With these tax changes looming as the biggest single issue affecting buy to let landlords in the UK, many have concerns about the future of their business. However, landlords are being advised to take their time and make small adjustments at first if necessary, and dismiss their fears about taxation changes.

A recent Property Wire panel experts’ debate on the future of buy to let concluded that buy-to-let landlords “…should not worry about it, instead they should be “taking it as part of the cost of running a business.”

Panellists stressed the importance of treating buy to let as a business, and that it needs to be run as a business. Landlords should realise that “they are in it to make money and therefore they need to make sure they are on top of their costs.” Read more here

Robert Pullen of accountancy, tax and advisory firm Blick Rothenberg, in a recent article for the Investor’s Chronicle, thinks that “Landlords still see the future of property investment as attractive, with the shortage of housing in the medium term supporting the trend of growth in rents”.

Commenting on the importance of the industry, Pullen says that the UK residential property sector has around the same total value as all of the companies listed on the UK Stock Exchange combined – it is a massive industry populated largely by small-scale investors owning less than 3 buy-to-lets.

“The market is diverse, with city apartments being the most favoured by passive investors due to the ‘lock and leave’ principle. In particular, ‘buy-to-let’ investments have become very popular, with most lenders now offering a buy-to-let mortgage package.

“It’s an investment that’s suitable for investors who are prepared to tie money up in real UK property with no immediate access to it, other than rental income. The investment is illiquid and there are transactional costs on purchase and sale. Money can be raised by mortgage against the property, with the debt repaid out of rents. Individuals who relocate abroad benefit by being ‘locked in’ to the UK housing economy while living away, giving protection from UK house price inflation,” says Pullen.

There is no doubt that with land availability at a premium, continuing planning restrictions and a severe shortage of affordable housing, plus high demand from tenants, small-scale landlords can continue to play an important role in supplying rental housing and maintaining an active market for those who want to rent property.

Landlords can still expect a relatively bright future: this with the rented housing sector at around 20 per cent of the market and expected to continue growing, due largely to high transactional costs of ownership and lack of regional affordability for young homeowners, increasing job mobility and an influx of immigrants.

Further information on the change is available on Gov.uk here

Please Note: This Article is 3 years old. This increases the likelihood that some or all of it's content is now outdated.
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