Buy-to-let landlords are facing a blow to their profits after a triple whammy of rule changes.

Last year a 3% stamp duty surcharge was introduced for anyone buying a second home. Then regulators told lenders to take a much tougher stance when assessing landlord’s ability to afford their mortgages. And, starting last month, the tax relief that landlords can claim against mortgage interest is being cut back, so that by 2020 it will be just 20%.

Until April, landlords could deduct all their mortgage interest from rental income before calculating their tax bill. 

Say you earned £14,000 rental income last year and had a £200,000 mortgage on the property at an interest rate of 3%. Your interest bill would be £6,000 a year.
Under the old system you deducted this sum from your £14,000 rental income, leaving £8,000.

Excluding other expenses higher-rate taxpayers would pay 40% tax on that amount which is £3,200. But this tax relief is being gradually scaled back over the next three years.

This year, you can subtract three quarters of the mortgage interest from the rental income calculating your tax bill.

So now, continuing with the same example, a higher-rate taxpayer would face a bill of £3,800, which is £600 more than they paid last year.

By 2020 all landlords will be charged tax on the full £14,000 and receive a 20% tax credit instead. Using the same example, a higher-rate taxpayer will then pay 40% on the full £14,000, or £5,600.

A tax credit worth 20% of the mortgage interest would be £897 in this case. That is then deducted from the total tax bill, leaving £4,400.

Over four years that’s a jump of £1,200 or 38%.

The changes mean landlords need to take a long hard look at their portfolios and work out whether they can still make a return on their investment.

But, don’t despair, there are ways of mitigating the impact of the changes.

For some higher-rate taxpayers, it may make sense to set up a limited company to hold their buy-to-let properties. This way they would pay corporation tax of 19% instead of income tax at 40%. But not all lenders will offer mortgages on properties via this structure,there are costs involved in setting up this type of arrangement and interest rates are much higher.

Other options for landlords include selling one of their properties in order to reduce the mortgage size on others in their portfolio.

Landlords who are married to a low earner could transfer one of their properties into their partner’s name to benefit from their tax-free personal allowance on rental income.
The best option for any individual landlord will depend on many different factors such as their tax band, whether their primary investment goal is to earn an income or make a capital gain from house price growth, and how many properties they own.

The good news is that mortgage rates are extremely low at the moment, so it is the perfect time to think about refinancing.

Simon Checkley, managing director of Private Finance says: “Don’t bury your head in the sand over the buy-to-let tax crackdown.

Take advice from a professional and make the most of the fantastic mortgage rates currently available which largely offset the reduction in tax reflief.

There are ways of restructuring your investments so that it may not be nearly as painful as you think.”

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