With so many other things to think about at the moment, the beginning of the 2020/21 tax year started somewhat unnoticed. However, for many landlords, it marks a significant and final change in income tax relief rules. Jeni Browne explains what these changes mean for property investors and how you might want to change your investment structures going forward.
Back in 2015, the then Chancellor of the Exchequer, George Osbourne, decided that allowing landlords to offset their mortgage interest payments against their income gave them a financial advantage over those who only owned their own home, and who could not do the same.
The belief was that this economic incentive had led to rapid growth in the buy to let market at the expense of owner-occupiers, which had the potential to destabilise the British economy. The Government decided to gradually reduce (over the years from 2017 – 2020) the amount of finance costs, including mortgage interest payments, that landlords could offset against their rental income. Instead, they applied a basic rate of tax-deductible (currently 20%) to all finance costs (including buy to let mortgage interest, loans to buy furnishings and overdrafts).
Firstly, these changes only applied to those who owned property in their personal name, rather than via a Limited Company.
Basic Tax Rate Payers
Basic Tax Rate landlords, whose combined rental profit (before finance costs) and additional income (including their salaries and pensions) are below £50,000, are mostly unaffected. It is important to appreciate that in deciding whether a basic ratepayer has a problem is determined by the total of their income before finance costs. This means that many basic rate taxpayers who are close to the higher rate boundary if adding back their interest takes them over the boundary will suffer additional tax.
Higher Tax Rate Payers
Those already in the Higher Tax Rate (£50,000 - £150,000 annual income) are worst affected. The more mortgage interest they pay per year, the higher the increase in their tax bill and the more significant the overall decrease in net income after tax.
What Can You Do?
A lot can change in five years; your buy to let property investment portfolio may look different now to how you expected it to be when these plans were first announced. Therefore, our advice would be to seek professional tax advice from an accountant as to what your options are going forward. There are five main options to consider:
If you’re not at all or only slightly financially disadvantaged by the changes, you may decide to carry on as you are.
Decrease your portfolio
Selling one or a few properties to lessen the negative impact of the changes is an option. Although, in our survey at the time of the announcements, very few landlords (14%) were considering this as an option. It really does depend on your circumstances and what advice you’re given.
Sell up everything
The most drastic option; again, this depends on what your tax advisor thinks is best for your given financial situation.
Transfer some properties to a spouse
In some circumstances, this is a tax-efficient route which can be looked into by your tax advisor.
Many landlords have decided to operate their buy to let property investment through a Limited Company rather than their personal name as the restrictions do not apply to this type of ownership. The reason for this is that Limited Companies pay Corporation Tax (currently 19%) rather than Income Tax and, crucially, they can continue to deduct mortgage interest and other finance costs from rental income. There are a few other benefits to owning property via Ltd Co, and it’s become an increasingly popular investment strategy for landlords over the last few years. You can read more about this in our helpful guide on personal vs limited company ownership of buy to let property here. Ultimately, however, it does depend on your current tax position, and we always recommend that you should take professional tax advice before you make any decisions.
How can we help?
As a mortgage broker, we cannot give you tax advice. However, we can provide information and guidance on the types of mortgage products and rates that would be available for you under any of the above options. As a specialist buy to let broker, we deal with large portfolios refinancing and limited company property investments every day and have access to the mortgage lenders who will underwrite your investments. If you’d like to chat through your plans, do not hesitate to contact our team on 0345 345 6788 or email email@example.com.