Views from the 17th - Landlords landlocked?
Landlords will now start to feel the full impact of the taxation changes to let properties introduced by George Osborne in the 2015 Budget.
That Budget saw the introduction of a 3 per cent Stamp Duty Land Tax surcharge on the purchase of a residential property which is not the buyer’s main home and the removal of wear and tear allowance. There was also something of a stealth tax introduced in that whilst capital gains tax rates fell to 20% from 28% in the last tax year, the reduction was not applied to gains from the sales of residential property.
6 April 2017 saw the start of the phased introduction of higher rate tax relief on interest on a loan used to acquire buy to let accommodation. As seems to be often the case these days, what may appear on the face of it to be a simple change doesn’t even go close to describing the complexity of the legislation to implement it.
In essence, over the next four years, the amount of loan interest which can be deducted from rental profits will fall by 25% each year being replaced by a “tax credit” equivalent to 20% of the amount of interest not deducted from profits.
By 2020, those paying higher rate tax will pay that rate on rental income above the higher rate threshold (currently £45,000) and will then get a deduction from the tax liability equal to 20% of the loan interest.
Not good news for landlords. What is worse of course is that the amount of taxable income received can then trigger additional tax charges. So let’s take someone with only rental income. Say their income before interest is £55,000 and they pay £5,000 of loan interest. Before these changes their taxable income was £50,000. In 2020 that taxable income will then be £55,000 with the reduction in tax for loan interest being obtained against the tax bill itself.. If that person had children who were eligible for child benefit then once taxable income exceeds £50,000, some of that child benefit is repayable to HMRC, creating a further tax hike. In this case, the increase in tax caused by a shift in the way taxable income is computed might actually be more painful than the loss of higher rate relief on the interest itself.
Some landlords have already looked at incorporation as a means of reducing the impact of the change. The incorporation of a property business can be achieved tax-effectively but requires care. (The team at Leathers LLP are experts in property taxation so please have a word if this is of interest!)
Obviously, paying down the debt will help given that it will create a reduction in the interest cost of the property in the first place. Some landlords might consider borrowing against the equity in their own homes to pay down the debt on the rented property portfolio given that interest rates on residential mortgages tend to be lower than those for buy to let.
Finally, don’t forget the possibility of using the best tax planning vehicle around – the spouse. It might be possible to lessen the impact if the spouse is a basic rate taxpayer but even this simple transfer will require some careful thought, discussions with the lender and some conveyancing work.
Some say that these changes will have such an impact that demand for properties will fall leading to some stabilisation of property prices which I guess would be good news generally. Let’s see if that turns out to be the case.