Taxing Times Ahead For Landlords?

Date Published 04 April 2017

This month we have seen the introduction of potentially one of the most punishing tax regimes to effect buy to let landlords.

The changes in mortgage interest relief will be phased in between now and 2020, so it is likely to be a few years before the true impact is felt.

At the moment, landlords can claim tax relief on their mortgage interest payments. In other words, they can offset the cost of the mortgage interest from their rental income when they calculate profits.

But this situation won't last for much longer. In summer 2015's budget, George Osborne announced that landlords would no longer be able to deduct all their mortgage interest when they calculate their profits. Instead the landlord will have to pay tax rate based on the rental income.

Similar changes were brought in Ireland in 2009 but were scrapped last year amidst the housing crisis; proof the tax may not work.

What could all this mean?

Demands for rentals are still rising, with 25% growth predicted by 2025 (RLA). This is a million or more homes across the UK. Can the corporates fund all of this?

There is evidence to suggest that private landlords provide choice and good value within the market. Some say that rents will increase to help compensate for the tax reform in the long term or landlords will leave the market place all together. This shift could lead to a more oligopolistic market (should landlords leave) with large PRS developers controlling rental prices, and unless regulated it remains to be seen if this could lead to increased rents.

What can be done about it?

The first thing to do is work out what effect it will have on your portfolio. The greater your income and the more highly leveraged you are, the greater the effect. But you might be surprised by how little difference it makes in your situation.

If the situation isn't looking good, you've got various options:

• Set up a company and sell your properties to it – although this will trigger CGT and Stamp Duty liabilities, and you'll need to re-mortgage
• Sell properties that are no longer profitable
• Attempt to cut costs to offset the extra tax you'll be paying

Let us know your thoughts!