How to cope with loosing buy to let tax relief

property tax

Are you an individual or a Company affected by the change in tax on property?

The recent tax change can either hold a cloud or silver lining for you… how best to cope with these obstacles.

You could be feeling a double blow with the announcement that tax relief on buy-to-let mortgage interest payments would be slashed from April 2017 and that buy-to-let properties (and second homes) would incur an extra 3 per cent stamp duty. If you’re new to buy-to-let, you might not appreciate the grand scale of this is. Up to now, people buying to let have been able to claim tax relief on their mortgage interest payments at their marginal rate of tax. This means that a basic rate taxpayer would get 20 per cent tax relief, but those at a higher rate would receive 40 per cent relief, while top-rate taxpayers could claim 45 per cent.

What’s changing?
Tax relief will be a flat rate of 20 per cent. Landlords who pay basic rate tax would see no change, but those on higher incomes will find themselves losing alot more in mortgage interest payments. Increasing your rents to compensate will probably not work as most tenants are already paying as much as they can afford. If you think you might be affected, there are a few other things you can try:

  • Switch to a shorter-term fixed rate deal to get lower rates of interest (be aware these mortgages carry more risk speak to one of our advisers to evaluate your risk 01908 523 420)
  • Place your property portfolio in a limited company structure – The pros are this enables you to pay corporation tax which is lower, rather than income tax on your profits. The cons are fewer providers will lend to a company.
  • Transfer ownership of one or more properties to your spouse if they pay a lower rate of tax, making sure this does not lift them into a higher tax band.

Silver lining for some landlords and homebuyers
If you’re a landlord with a lower income, you’re no longer at such a disadvantage to those with a larger property portfolio for instance you may wish to use your pension pot to buy rental property. If you are a homebuyer, you may find prices becoming more affordable as the competition from buy-to-let decreases.

Contact one of our mortgage adviser(s) to arrange a FREE mortgage review we would be happy to answer your questions and more.