Chancellor George Osborne has recently announced two very important changes to the buy-to-let property market. Firstly, from April this year buy-to-let properties and second home owners will face a 3% stamp duty surcharge. Secondly, as from April 2017 tax relief for buy-to-let mortgage interest payments will be moved to a fixed rate.

The announcement has already spiked an increase in the completion of properties before the extra stamp duty is officially enforced as well as left many landlords questioning whether it may be in their best interest to scale back on their property portfolios before the tax changes take effect.

The Changes

Until now those buying to let have claimed tax relief on their mortgage interest payments at a marginal tax rate, however from next year a 20% flat rate will be introduced. Whilst this may come as good news for lower income landlords and homebuyers, those on higher incomes (as demonstrated in the table below) will incur a higher loss in profits due to higher mortgage interest payments.

Taxpayer Rate Current Tax Relief
Basic Rate 20%
Higher Rate 40%
Top-Rate 45%

The Figures

For landlords with a £150,000 buy-to-let mortgage on a property worth £200,000 at a monthly rent of £800, the current net profit would be approximately £2,160 per year. Once changes have been enforced, the net profit would be reduced to £960.

*Estimated figures source: Nationwide Building Society

The Solution

Rather than increasing tenants rent, here are a few other options to consider for those affected by the changes:

  • Switch to a shorter-term fixed rate mortgage – although this can sometimes carry more risk, it may help secure lower interest rates.
  • Set up a limited company – moving your property portfolio to a limited company will reduce the tax impact on your profits as instead you will be subject to corporation tax. However, it is important to take note that this may make you less attractive to mortgage lenders.
  • Transfer property ownership – if your spouse is subject to a lower interest rate it may work in your favour to put one or more properties in their name so long as they can remain within their current tax band.

Our Head of Residential Property, Jenny Bland, says:

“Most people are aware of the well-publicised proposed government changes to Stamp Duty for landlords. However, the changes taking place in reducing the amount of tax relief that can be claimed by Landlords seems to have slipped under the radar. We believe that this will have more of an impact on landlords than the proposed increases in Stamp Duty will.”

To speak to our Property Law experts about your concerns call 0113 284 5000 for advice.

Share this...