[Property]_
Softening_ the_ blow_ for_ landlords
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The tax changes announced in 2015 may have had a major impact on landlords profits. The headline-grabber – an extra 3% stamp duty on residential properties other than your main home or first step on the property ladder – has already been implemented, so you might think the worst is over. But beware, another big change filters through from 2017. Here are the details, and our advice on how to reduce its effects.
Tax relief cut
From 6th April 2017, the government is reducing tax relief on interest payments for mortgages or loans used to purchase or renovate buy to let properties. The change will be phased in over four years. Currently, if you pay tax at the 45% top rate or 40% higher rate, you receive tax relief on your mortgage or loan interest at those rates, as a deduction of the interest costs from your rental profits.
That relief will be phased out, so by 2020/21 your finance costs will need to be added back to your rental profits and relief will be restricted to the basic rate of tax, currently 20%.
As a 45% or 40% tax payer, you could pay significantly more income tax on rental profits.
Possible strategies
If your spouse or civil partner pays basic rate tax, transfer ownership of one or more of your properties to them. There are no capital gains tax implications, but if the property is mortgaged there’ll be stamp duty to pay. Make sure the rental income doesn’t push your spouse or partner into a higher rate tax band.
Alternatively, you could transfer your property into a limited company; you’ll pay corporation tax on your profits, rather than the higher rate income tax – saving up to 25% of the profits. Importantly, there’s no restriction on finance costs. Be aware there are capital gains tax and stamp duty issues to consider and fewer mortgage providers will lend to companies – but we’ll be happy to advise.
Should you find yourself as a landlord with diminishing profits, please talk to us. We’ll do everything we can to restore your faith in property.
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