For those who need to complete an HMRC tax self-assessment, and that includes any buy-to-let landlord receiving income from property in 2017/2018, here’s a reminder that your return must be filed and the tax paid by the 31st of January – tomorrow, Thursday.
This year is the first time that the loss of buy-to-let mortgage interest tax relief will be felt, as the first phase of the reduction of this relief affects the 2017/2018 tax year under Section 24 of the Finance Act. Further reductions are to be phased-in until 2021.
This, coming on top of the 3% stamp duty surcharge, stricter lending rules, and a much tougher regulatory regime for buy-to-let, is discouraging some landlords.
Up until this year, private residential landlords with a mortgage on their buy-to-let could deduct the full amount of the interest they paid on their mortgage from their rental income, a very straightforward calculation to find the tax due.
Now however, since April 2017 when the new regime started, the relief is being phased out, and is replaced with a tax credit, and a complicated calculation that means most landlords, especially those on the high rate of income tax, will pay more tax. Rental income is now added to income before the tax credit is applied, which means that some landlords will be caught in a higher tax bracket.
The increased complexity of the tax calculations as the changed are phased in over the next three tax years means that a landlord’s tax calculations will be different each tax year until 2021 – it’s a fundamental change in the way landlords arrive at a taxable profit, and generally for most people it’s not in their favour.
These changes, coupled with the stamp duty surcharge, a stricter mortgage application regime for buy-to-let mortgages, means that fewer mortgages are being take out, and some landlords, finding that their tax position is not favourable, are pulling out – they are selling rental properties.
A recent Ministry of Housing report shows that the number of privately rented homes in England has fallen from its peak by 46,000 to 4.79 million today – the largest reduction in rental housing stock since the introduction of the shorthold tenancy in 1988.
Landlords have been looking at various methods to circumvent the effects of the Section 24 changes, such as incorporating their property business or transferring properties between spouses. Those landlords without mortgages, a considerable proportion of landlords, will be less affected.
Anyone unsure of their tax position or contemplation making changes as a result of Section 24 should seek professional tax planning advice.