Loss of Tax Relief and Preparation for Tax Returns Required
The start of April hailed "Axe the Tenant Tax Awareness Week" (https://www.facebook.com/clause24/) but sadly it’s probably not going to make much difference to the fact that from 6th April 2017, all landlords have to do their accounts in a very different way. For some, especially higher rate tax payers, this is likely to result in substantially higher tax bills than seen in previous years.
As a reminder, back in 2015 George Osborne announced that anyone letting a property would not be able to deduct mortgage interest relief – or other finance costs – from the rent they receive at higher rate tax levels, in Section 24 of the Finance (no.2) Act 2015.
The full impact of this decision won’t hit until 2020/2021 as the loss of the relief will be phased in, reducing by 25% each year.
The information has been laid out in detail by the Government website.
During 2017/18 the property income you earn will be “restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction”. Next year it reduces to 50%; 2019/2020 to 25% and 2020/21 “all financing costs incurred by a landlord will be given as a basic rate tax reduction”.
Who will be affected?
Landlords who receive “rental income on residential property in the UK or elsewhere” – in other words it also affects you if you let properties overseas or are a non-UK resident letting here. You are not affected if your property is classed as a ‘furnished holiday let’.
According to the government, this will only affect one in five landlords, but that won’t be known until the actual Act is implemented, nor will whether the government will generate the hoped-for £665 million in 2020/21.
And this doesn’t just affect mortgage interest but overdrafts and loans to purchase things like furnishings.
Does this mean it’s better to buy with cash than with a mortgage?
One of the key reasons buy to let has delivered good results for landlords in the past is because you can take, for example, £100,000 and buy property worth a lot more, for example £200,000. As long as the properties/property rise in value, so will your returns, all because you can gear with a mortgage.
As such, this doesn’t necessarily mean it’s always wise to hold property with cash; mortgaging your property portfolio can help to boost your investment returns, even after this tax has been implemented - see here.
What do you need to do?
The first thing you need to do – even if you are currently a lower rate tax payer – is to double check the impact on you. Because the changes actually impact on the way you account for costs versus your rental income, some who are currently lower rate tax payers may well be pushed into a higher rate tax bracket and get hit with the loss of relief.
Secondly, it is worth re-evaluating how you are financing your buy to let portfolio and the future returns you will receive, not just based on this tax change but also on the changes to Capital Gains Tax (recently reduced for financial investment).
This, together with the incredibly low mortgage rates currently available, mean it is worth talking to a property tax expert and making sure you are taking advantage of the benefits that gearing can deliver to your property investment returns.