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Buy to Let Tax Changes

Buy to Let Tax Changes

Section 24 Tax Changes

With George Osborne’s tax changes announced in his 2015 budget now in full effect, it’s worth taking a quick look at the incepted changes and how they have impacted landlords.

Before we start, it’s worth stating the absolute obvious – we are not tax advisers, but we know quite a bit how landlords are treated from a taxation perspective, so here are the basics of the changes.  Please note that this is absolutely not intended to be a substitute for solid tax advice.  Please seek professional bespoke advice for your own situation.

Section 24 is and was a gradual tapering down of interest relief for personally held buy to let mortgages which begun in April 2017 and came into full impact in April 2020, when tax relief on mortgage interest payments were limited to basic rate tax only on personally owned buy to let properties.

What this essentially means in very basic terms, is that landlords owning mortgaged property in personal names can experience unusually high tax rates due to only being able to claim a 20% basic rate tax relief, despite perhaps being a higher or even additional rate taxpayer themselves.

This tax has since been dubbed a retrospective “tax on turnover” for landlords with personally geared property.

The Buy to Let Broker now finance a majority share of its clients purchases in Ltd company name for various reasons including the one above.

The moral of the story is that we would always urge you to take tax advice before entering into any new buy to let mortgage arrangements or acquisitions.  This ensures as a landlord you enter into any arrangements with your eyes wide open.

More details of this can be found here →

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What Does This Actually Mean For Landlords?

Well, similarly to any business if you incur business expenses they reduce your profit and you only pay tax on rental income profits, therefore any interest you incur on personally held buy to let mortgages once enjoyed tax relief at your current rate of taxation.  That’s the same for any legitimate business expense regardless of the business.

Dubbed a “Tax on Turnover” the rules now incepted remove that so-called ‘tax benefit’ and limit the amount that can be mitigated.

So at a very basic level in accounting terms, as a landlord, your turnover is made up of your total rent receipts throughout the tax year and usually, all your costs including mortgage interest payments will be deducted, to determine your profits and in turn individual tax rate.

Now however your mortgage interest as a cost is initially set aside, and you can only deduct the other costs to determine your rate of tax, so if you imagine you now have a much higher ‘income’ as your mortgage payments are being ignored.

Now if your turnover and mortgage payments are quite substantial or if you have income from other sources – this could have the effect of pushing you to a higher rate bracket, but with the ability to only claim back a minimal 20% tax credit on your mortgage interest payments as opposed to a higher 40% or even 45% should you be a higher rate taxpayer.

For those with heavily geared portfolios, it’s highly likely that this change has significantly impacted your finances, so we urge you to take tax advice asap.

Obviously, for some with smaller portfolios your effective tax rate may not have changed, but check with your accountant as if you have a main PAYE employment or own shares in your own business, this could already have you in a higher tax bracket and therefore you are impacted by this legislative change.

Whether we agree with these tax changes or not, the best way to go forward with any change is to make you aware of ways you can minimise the impact of any changes going forward as it’s true to say that some, especially those with sizeable highly geared portfolios can be paying tax where there is no profit, which we have to admit is somewhat inconceivable.

What Can You Do Now And In The Future To Combat This Situation?

The first thing to do is to take specific tax advice, a tax expert can give you tailored advice and help ensure you are making your rental property more tax efficient.

Here are some ideas to start the ball rolling;

  • Hold property jointly with your spouse as tenants in common.  So if your partner or spouse doesn’t work, there may be an unused personal allowance (£12,500 in 2021) – it can help to include them and utilise their lower tax band to divert some income to, also holding property as ‘tenants in common’ allows you to own different percentages which in turn can help.  This will require adding a name to the title of the property, and if mortgaged its possibly you’ll need to refinance or at least have the original mortgage add the 2nd party.  Talk to your solicitor for more information.
  • In certain circumstances, it may be possible to move your property to a limited company, although there are some hurdles to this, mainly the fact you could trigger a Capital Gains Tax bill and the need to pay stamp duty when the company purchases from yourself individually.  However, once in the limited company there are tax advantages to reap, but chat to your accountant in the first instance.
  • You can choose to purchase future property in a limited company.  In an limited company mortgage interest relief stands, and it can certainly be a more tax-efficient way to invest, corporation tax was reduced to 19% in 2021 – however, there are fewer products out there for companies, you’ll usually pay a premium in the interest rate and in the Spring Budget 2021, Corporation Tax increased was announced – again take expert advice.
  • Sell the property and reduce your mortgage debt.  For those landlords with more sizeable portfolios, and more highly geared debt, selling some property may be the only way to keep your head above water.
  • Raise rents.  Not the first option to look at, but inevitably this may be an ironic and unintended consequence of the changes.

Don’t forget that changes to stamp duty need to also be considered when investing.

Expert Advice From Buy to Let Experts

If you would like to know more about buy to let mortgages, complete the contact form below and one of our experts will be touch.
Alternatively you call call us on 08009499410.

The Buy to let Broker Connor, Louise and Sophie


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