Landlord Tax Changes

From April 2017 the government’s new tax regime will start to affect Buy-to-let landlords.  These changes will be phased in over four years.

Many expert commentators think that Landlords may be forced to raise rents or sell their properties as the phased tax changes begin to bite.

Currently the landlord’s interest payments made on mortgages as with other types of business, is a valid deductible expense, so the landlord only pays tax on their actual profits.

Starting in the 2017-18 tax year this will be changed over 4 years, which is likely to increase the amount of Income Tax due.

Research from the National Association of Landlords shows that the new rules could affect over 400,000 of UK landlords (25%) with them facing a tax increase from the 20% basic rate, to the 40% higher rate once the new rules start to come into force.

The new rules will affect all landlords who whose total rent and other income (before mortgage or other interest is deducted) exceeds the 40% Income Tax threshold.

In the 2017-18 tax year, 25% of finance costs will be subject to the new rules, rising to 50% in the 2018-19 tax year, 75% in 2019-20 and 100% from the 2020 tax year onwards.

For many landlords who have high levels of borrowing these phased changes, coupled with any mortgage interest rate increases, could make their business unprofitable.

In the market buy to let landlords are buying new homes and renting. This has affected demand and in some cases is seen as at odds with the Governments Help to Buy scheme.

These tax changes may see some of this housing stock being sold by the Landlords or the cost being passed on to their tenants in the form of rent increases.

There are landlords with 1 -5 properties who invested their money into property because they were getting no interest on their savings in the bank, or following the financial crisis, no longer trust the pension model, who are now reliant on rental income.

As you would expect there are strong arguments and opinions from both sides.

“Landlords will face an impossible decision of whether to increase rents and cause misery for their tenants, or to sell-up, and force their tenants to find a new home”.

Economists at the Institute for Fiscal Studies said: “There is a big problem in the property market making it difficult for young people to buy, and pushing up rents. The problem is a lack of supply. This change will not solve that problem.”

But the Bank of England’s policy to reduce high loan to value buy-to-let mortgages continues to take effect. Here is the latest PRA press release in September 2016.

Roy Horton writes for Leicester Conveyancing Solicitors BHW Residential