Can a Landlord minimise the implications of Mr Osborne's recent budget? by Andrew Kay
Can a Landlord minimise the implications of Mr. Osborne’s recent budget?
The Chancellor slashed the tax relief that landlords in the top tax brackets receive on their mortgage interest payments, cutting it from the higher income tax bands, 40pc and 45pc, to 20pc by April 2020.
These changes are being phased in gradually and will not affect the basic rate taxpayer and those who are fortunate to own their property free of mortgage. In addition, while interest rates remain low, the impact of the changes will be minimal.
There will be landlords who feel that the tax changes make their investment less attractive and the same changes may put off potential buy to let investors, however, there are a number of reliefs still available (not covered by this blog) and the tax burden can be minimised by a simple reconstruction of the portfolio (see below).
1 - Incorporate
Private landlords who are facing losses following the Government's decision to cut tax relief on buy-to-let properties could protect their income by turning their rental activities into a business. If a private landlord transfers one or more properties into a company structure, known as incorporating a business, the total tax rate is greatly reduced. This is because a company is paying corporation tax on the actual profit and therefore the rate does not fluctuate as much. If the profit reduces, so does the tax. There are stamp duty and capital gains tax implications and a calculation of short and long term gains and cost will need to be undertaken.
2 - Remortgage
If a buy-to-let landlord is paying 5pc on a typical £120,000 mortgage, he might currently be earning rental income of £750 per month or £9,000 annually. After allowing for expenses, agents' fees and mortgage interest he is left with a £612 annual profit after tax, according to brokers L&C. However, when tax relief is reduced to 20pc that profit turns into an annual loss of £588. By remortgaging at, say, 3.79pc with a five-year fixed-rate loan from Virgin Money, he can save £1,452 annually on his interest bill, turning that annual loss back into a profit of £574.
3 - Use your spouse's personal allowance
Where you do make profits, if your spouse is not working, you may be able to assign part or all of the rental income to them, allowing them to exploit their personal tax allowance, due to rise to £12,500 by 2020, or 20pc tax band.
4 - Sell property and reduce loans
The changes should prompt landlords to reassess their holdings, with a view to selling up or paying off some of the loan. Ray Boulger of mortgage broker John Charcol said: "Some will take the changes on the chin, while others will wish to reorganise their arrangements. Where you have a portfolio, it may make sense to sell one property and reduce the borrowings on others."
5 - Raise rents
Many commentators believe rents will have to rise, although how easy that will be given recent sharp upward moves remains to be seen. Inevitably there will be fewer buy to let properties available for rent with some landlords deciding to leave the market and I don’t see any downturn in tenant demand. Simple economics dictate that where supply of a product is reduced and where demand remains unaffected, prices will increase until a new equilibrium is reached which makes the investment viable again.
You are welcome to contact Arkade Property to discuss the implications of the new tax changes and the reliefs which can still be claimed.