Buy to Let Tax Changes
What Are They?
With George Osborne’s tax changes announced in his 2015 budget now in full effect, it’s worth taking a look at the incepted changes and how they have impacted landlords.
Following Osborne’s announcement, there 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 was limited to basic rate tax only on personally owned Buy to Let properties.
Additional Update: In the Spring Budget 2021 the Chancellor of the Exchequer, Rishi Sunak, also announced upcoming changes to Corporation Tax which will see Corporation Tax rise from 19% to 25% from 1st April 2023, which could impact some Limited Company landlords.
However, for businesses making no more than £50k profit, Corporation Tax will remain at 19% post April ‘23 – this will obviously encompass many SPV landlords…in fact, it covers 70% of all UK business.
For profits between £50k and £250k, there will be additional reliefs to taper the effects, and only above £250k will be impacted by the full 25%.
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 Ltd 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 Ltd 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.
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