Landlords face tighter mortgage interest relief tax regime

In the series of changes phased in over four years to April 2020, the tax relief that landlords of residential properties get for finance costs will be restricted to the basic rate of income tax.

The start of the 2017/18 tax year today brings in a new set of calculations for landlords who will have to pay tax on total income, including all rent, before claiming a tax reduction of 20% by 2020.

Regardless of whether you live in the UK or abroad, if you let property in the UK, the only exempt landlords have furnished holiday lets, let properties in a limited company tax wrapper or are still basic rate tax payers after rental income.

The change was announced by George Osborne in the Summer Budget of 2015 in a bid to discourage less professional landlords and has already led to a 16% market contraction, according to Council of Mortgage Lenders figures, with a further 15% slowdown expected this year by Legal & General, as reported in Mortgage Solutions yesterday.

Prepared landlords have been reshaping portfolios to sell off the lowest-yielding properties for some time, moving homes into limited company wrappers or readying to raise rent, although many landlords are likely to be surprised by the higher tax liability as the tax changes start to bite. The National Landlord’s Association has estimated the changes will push an extra 440,000 landlords into the higher rate tax bracket.

Paul Brett, managing director of intermediaries at specialist lender Landbay said: “Many landlords will take another hit this week, as the government focus on the private rented sector continues to narrow.”

He said landlords are already juggling tighter underwriting standards and an additional 3% Stamp Duty, landlords and will be bracing themselves for further margin cuts.

“In this regulatory minefield, it’s now more important than ever that brokers work closely with landlords in reviewing portfolios to ensure revenues remain as stable as possible,” he added.

Brett added: “There are ways of managing tax, ownership and mortgage products and although this may incur several further fees along the way, it is arguably the most profitable option for landlords. For example, switching to shorter-term fixed rate deals or transferring ownership of one or more properties to your spouse. What won’t work is simply hiking up rents to compensate as most tenants are already paying as much as they can afford.”

John Eastgate, sales and marketing director of OneSavings Bank, said: “Worryingly, one in six landlords do not understand the financial implications of the changes and will be in for a nasty shock when they find that they can no longer deduct all finance costs from rental income at the end of the 2017/18 tax year.”

He continued: “Indeed, as financing buy to let becomes more specialised and complex, I cannot emphasise enough to landlords, who are considering incorporation, the importance of seeking professional advice as it may not be suitable for everyone.”