Unless you have been living under a rock recently, you should be aware of some imminent alterations to mortgage interest tax relief.
The changes are set to come into force this week (April 6th) and are sure to have implications for buy-to-let landlords and tenants alike.
But just what is changing and what can investors do in order to cope, ultimately maximising their returns?
Ryan Weston, of Just Landlord Insurance Services, explains:
What is changing?
‘In the Summer Budget of 2015, then Chancellor George Osborne announced plans to alter how mortgage interest tax relief is calculated by buy-to-let landlords.
Presently, landlords can cut their taxable income by deducting the cost of some expenses. These include letting agent fees, mortgage interest and repairs.
Under the new legislation, landlords will still be able to deduct those costs, but cannot offset the cost of their mortgage interest from their rental income when working out profits. Instead, only a portion of this can be deducted.
Some good news for investors is that these amendments are being phased in gradually, with four equal changes over the next four years. By the year 2020, all relief will be worked out at a basic rate of tax rate reduction.
What is the main issue?
A large proportion of landlords will not be impacted on by the changes. In fact, the Government suggests that just one in five individual landlords will receive less relief as a result of the amendments.
The main issue is for landlords that are pushed into a higher tax bracket as a result of the changes. Tax will be due on turnover, as opposed to profits, which will be higher as a result of landlords not being able to offset interest from their income. Should mortgage rates rise, but rents stay static, landlords can expect to be out of pocket.
It is feared a higher-rate taxpayer landlord whose mortgage interest amounts to 75% or more of their rental income will see their returns gone by 2020. What’s more, an additional rate taxpayer with interest of 68% of their income could also see their returns disappear.
Concerns are growing that a number of landlords, already hit by the 3% additional stamp duty surcharge and other measures, will past those costs onto their tenants in the form of higher rents. Many could also be forced out of the sector, a worry given the existing supply/demand imbalance.
How can you adapt?
It goes without saying that changes, increased costs and surcharges are never particularly welcome. However, for the most proactive landlords, there are measures to keep costs down.
Form a limited company- Limited companies owning properties will be unaffected to the alterations to mortgage interest tax relief, meaning a number of landlords have already chosen to incorporate.
Transfer to a spouse- Another option is for a landlord to transfer their property to a spouse or partner, in order to stop themselves entering a higher tax bracket. However, this could serve only to raise the spouse’s income over the threshold or lead to costs outweighing the benefits of the transfer of ownership. It is important to consider that the Government will see any transfer of ownership as a sale, meaning that capital gains tax could come into force.
Remortgage- Interest rates are currently at record lows, meaning that there is scope to negotiate better deals than a few years ago. As such, landlords could get a more favourable agreement through remortgaging. In addition, having a rental property revalued will take house price growth into account. This will allow mortgage lenders to recalculate LTVs.
It is imperative that you are well informed before choosing to take up any of these options, to ensure that you are making the correct financial decision. Make sure you get independent financial advice if you are unsure of your best way forwards.
Learn how the mortgage interest tax relief changes will impact on you, before the changes take hold!’