The new rental tax; will it catch you out?

PUBLISHED: 16:38 09 February 2018 | UPDATED: 16:38 09 February 2018

Handing keys in the house background

Handing keys in the house background


April 6 last year marked the introduction of the profound changes to the taxation of buy-to-let investments, leaving landlords scrambling around trying to protect themselves from higher tax bills due to the reduced deductibility of mortgage interest.

Jon Hook, Norwich Accountancy ServicesJon Hook, Norwich Accountancy Services

From the 6th, buy-to-let investors who are also higher rate taxpayers can no longer offset all of their mortgage interest against rental income before calculating the tax due. The reduction will be phased in between now and 2020 and will be replaced by a 20 per cent tax credit.

In year one, (2017/18) landlords will be able to offset 75 per cent of their mortgage interest against rental profits then 50 per cent in 2018/19, 25 per cent in 2019/20 and nothing in 2020/21!

Although it may seem that it only affects those who already pay higher-rate tax, the way the ‘tax’ is structured means that it will push some basic-rate taxpayers into the higher-rate bracket because their net rental income will appear artificially higher due to the reduced (and eventually) eliminated deductible mortgage interest. Although replaced with a ‘tax credit’, this taxable rental income ‘inflation’ will, in certain cases cause means-tested benefits to be lost which will hurt a lot of people who are just ordinary Britons trying to improve their lot.

It should be noted though that the change does not apply to those who own property through limited companies, just private individual landlords.

To mitigate the effects of this new ‘tax’, landlords will need to become more focused on cost cutting especially with mortgage interest where they can. If they have savings, they should look to getting an offset mortgage which means interest is only charged on the net balance thus lowering the monthly interest cost.

Other ways to reduce mortgage interest include remortgaging to get a better rate of interest or reducing the mortgage balances via overpayments. Other ways to mitigate the effects include increasing rents, which is never a popular option but an inevitable one for some landlords.

Already landlords have taken a number of steps to help protect their finances with some even remortgaging their main residence using the released cash to pay off some of the mortgages on their buy-to-let properties.! Others have moved their properties inside limited companies in order to dodge the tax changes despite incurring other costs including large capital gains tax bills.

It seems that the government has declared war on private landlords in recent years with this change coupled with the nasty stamp duty land tax surcharge on additional properties, just another example of the onslaught against those trying to better themselves and their families. Unfortunately, although the incidence of the tax may fall on landlords, the unintended impact may actually fall upon some of the more vulnerable members of our society, tenants!

Overall it is an unequivocal ‘lose lose’! Good work Westminster!

Jon Hook is on 01603 630882 www.norwichaccountancyservices.co.uk

Norwich Accountancy Services has sponsored this column.

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