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Do you own a buy-to-let property?

27 February 2018

Do you own a buy-to-let property?

If your buy-to-let property is mortgaged you need to be aware of fundamental tax changes. You can currently offset 75% of your mortgage interest against your profits. From April 2018 the percentage of finance costs deductible from rental income will drop to 50%, falling to 25% in 2019 and 0% in the tax year 2020 to 2021. Before the then Chancellor George Osborne introduced the phasing in of this fundamental change in taxation for landlords, back in 2015, landlords just paid tax – according to their income tax band – on their rental income after mortgage interest payments were deducted, ie: on their profit.

These radical changes to buy-to-let tax relief are already having a significant impact on existing landlords and have undoubtedly dampened enthusiasm amongst individuals considering their first buy-to-let property, where a mortgage is required. Currently, for example, if you are a higher-rate taxpayer, the new tax will wipe out your returns if your mortgage interest is 75% or more of your rental income.

From April 2020 finance costs won’t be taken into account to work out taxable property profits. Instead, once the Income Tax on property profits and any other income sources have been assessed, your Income Tax liability will be reduced by a basic rate ‘tax reduction’. Whilst this move mainly affects those who already pay higher-rate income tax, it will push some basic-rate taxpayers into the higher-rate bracket once their rental income has been taken into account.

Some existing landlords have chosen to reduce their portfolio in order to minimise their tax liability, despite facing potentially large capital gains tax bills. Some London landlords are selling their buy-to-let properties in the Capital and buying two or three properties elsewhere, and doing so via a company in order to avoid the tax changes. These changes apply only to private individual landlords and not to those who own property through companies. Other landlords who own smaller portfolios are seeking to reduce costs by switching to a lower rate buy-to-let mortgage, reducing the mortgage amount or raising rents to make up the shortfall.

If you would like an informal, discreet valuation – perhaps without disturbing your tenant initially – please make contact with your local Perry Bishop and Chambers office.

Please seek your own guidance from an FSA approved Financial Advisor on tax and individual circumstances.