From 6 April 2017, the government will start to restrict basic rate, income tax relief for landlords' finance costs on residential properties.
Latest research by YouGov*, after surveying 925 mortgaged buy-to-let landlords in December and January, suggests that most buy-to-let landlords know about the impending changes and are preparing themselves. Others are not so worried – perhaps because they do not already take advantage of mortgage interest relief or fall below the threshold for paying income tax.
Tax relief changes
The tax changes will affect individuals who receive rental income on residential property in the UK or elsewhere and incur finance costs (such as mortgage interest) (excluding where the property meets all the criteria to be a furnished holiday letting).
The government’s aim is to make the tax system fairer and to ensure that landlords with higher incomes no longer receive the most generous tax treatment. This change will be introduced gradually over the four years from 2017 to give landlords time to adjust:
in 2017 to 2018 the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction;
in 2018 to 2019, 50% finance costs deduction and 50% given as a basic rate tax reduction;
in 2019 to 2020, 25% finance costs deduction and 75% given as a basic rate tax reduction; and
from 2020 to 2021, all financing costs incurred by a landlord will be given as a basic rate tax reduction.
The Council of Mortgage Lenders (CML) queried whether those landlords who thought the changes would not affect them, (about 30% of those polled in their own survey in late 2016), could be in for a rude awakening. That said, the CML highlighted several reasons why the changes might not affect a landlord:
“For example, if you operate your lettings through a corporate structure, fall below the threshold for paying income tax, transfer the property to a spouse who does not pay tax, or do not take advantage of mortgage interest relief in the first place, the changes would not affect you.”
Individual landlords are concerned about the effect that higher tax bills will have on their business and are taking steps to bolster their income. Some are planning to increase rent to cover the lost income while others are planning to transfer ownership of the property into a corporate structure or to a partner.