If you are a buy-to-let landlord, recently you may have been feeling like someone has got it in for you. Firstly, the budget slashed tax relief, and then in Autumn, Chancellor of the Exchequer Philip Hammond added extra stamp duty.
Perhaps you have now found your property portfolio looking not so spectacular. With these two surprise moves, the Government announced that buy-to-let properties would incur an extra 3% stamp duty and that from April 2017, buy-to-let mortgage interest payments would be slashed.
Tax relief on buy-to-let;
If you’re new to the buy-to-let scene, you may not fully appreciate the magnitude of what this is. Until now, people who buy- to- let have been able to claim tax relief on the interest payments from their mortgage at their marginal rate of tax. This meant that a basic taxpayer would get a 20% tax relief. Those at higher rate would receive a 40% relief, while top rate taxpayers could claim 45% tax relief.
When the changes begin to roll in, tax relief will just be 20%, across all rates. While this news is a relief for landlords on basic rate tax, high rate and top rate taxpayers are likely to be troubled by this news, which will see them losing more in mortgage interest payments.
The impact of this;
Estimated figures published by The Nationwide Building Society portray how a typical landlord’s profits will be affected. They looked at a landlord with property worth £200,000, and a £150,000 buy-to-let mortgage. With a monthly rent of £800, in the old system they would have a net profit of £2,200 a year. However, under this new system it would plunge to £950. Other estimates have been even worse. Essentially, the more interest you pay, the more you will feel the strain. It’s why the last thing landlords wanted was an additional stamp duty.
What’s the answer?
The first thing we can tell you is one thing that won’t work is increasing your rent to compensate as most tenants are already paying a fortune. If you think you will be affected by this, try a couple of these methods.
• If your spouse is on a lower rate of tax, you can transfer ownership of one or more properties more to them. All the while being careful that this does not lift them into a higher tax rate.
• Switching to short-term fixed rate deals will provide lower rates of interest. Be wary though, these mortgages carry added risk.
• You could place your portfolio in a limited company structure. Instead if paying income tax, you will now be paying corporation tax. However, fewer mortgage providers will lend to a company, meaning your mortgage options are narrower.
Although the news is devastating for many landlords, those with a lower income will now find themselves at less of a disadvantage when compared to those in the big league. In fact, this level playing field has been predicted to bring in a wave of ‘silver landlords’ looking to buy rental property with their pension pots. Also if you are looking to buy, you may discover that house prices are now becoming more affordable as competition from buy to let fades away.
It is worth talking to a financial advisor to get more clarification on your specific situation.