Any buy-to-let investments are now subject to a new, higher form of taxation. If you are one of the landlords affected, will you be able to cope with the new tax increases?
In short, the changes mean that it is no longer possible to offset your mortgage interest against your profits and by 2020 none of the interest will be tax deductable. The result of this is a higher tax bill for many landlords across the UK.
Taxation Changes
The new rules only apply to private individual landlords, so those who own properties through companies should be unaffected. The changes to the rules mean that if you are one of the higher-rate tax payers, it is no longer possible to offset all of your mortgage interest against your rental income. If that income has not increased then you are likely to be hit with a higher tax bill. This is a gradual change that is taking place over the next three years and will instead be replaced by a 20% tax credit.
Whilst the change is aimed at higher-rate tax payers, some basic-rate tax payers may find themselves pushed up a bracket.
The Solution
The saying goes that the only thing that is certain in life is death and taxes, and so it is unlikely you can escape taxation completely, however, there may be some ways to get around the rules.
The first thing to do is seek professional advice. It may be beneficial to sell your buy-to-let property investments, and invest in a new portfolio through a company. Whilst this may dodge the new rules, it can leave you with a substantial capital gains tax bill instead, so it is important to weigh up which is the better path for you.
If your property group is much smaller then you need to concentrate on your outgoings. It may be more practical to look at reducing your mortgage amount or the rate you are paying. It is an unpopular choice in most cases, but raising your rental prices is also another option, and likely to be one that many landlords turn to first.
Paying off some of your buy-to-let mortgage could help, and with residential mortgage rates being lower that buy-to-let ones, remortgaging your own home could be one way to do this. As property bought through a company will not be affected by the changes, moving where your property is held can present a solution. A tax advisor should be consulted before taking action as both of these options have their own costs involved which could end up being more than the increased tax levels.
Buy-to-let offset mortgages are available to some, however, these are often tested to ensure the landlord can afford the loan based on the rental income in comparison with what mortgage payments they could make if interest rates increased. These types of mortgages can reduce costs by allowing you to put savings and rental income into the account to reduce the monthly interest bill.
The changes to this buy-to-let taxation are already taking effect, and the amount of your mortgage that you can offset against your profits will fall in stages over the next three years. Whatever changes you make to your investments need serious thought and advice from an expert, but to really benefit from your decisions, you will need to move quickly.
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