Taxing situations impacting buy-to-let

Relief will be restricted to the basic rate of income tax of 20 per cent.

In essence, landlords will no longer be able to deduct the cost of their mortgage from the rent they receive from the property to arrive at their property’s profits.

The new tax is scheduled to be introduced like this:

1) 2017 to 2018 - 75 per cent of finance costs can be deducted with the remaining 25 per cent a basic tax rate deduction.

2) 2018 to 2019 - 50 per cent can be deducted and the rest reduced at basic rate.

3) 2019 to 2020 - 25 per cent of finance costs can be deducted and the rest is at basic rate.

4) 2020 to 2021 - 100 per cent of a landlord’s finance costs will get a basic rate tax.

The government’s stated objective with the tax change is to ensure that landlords with higher income no longer receive “the most generous tax treatment”.

The estate agency Savills has already produced data on the likely impact of the tax change based on the current average buy-to-let property - £115,000 mortgage, £214,000 property (average LTV of 54 per cent).

With a mortgage rate of 3.25 per cent and the current tax relief structure, the net surplus income after borrowing for the average buy-to-let property is £2,562.

Fast forward to 2020, when the only finance relief will be a basic rate tax reduction and adjusting for a 2 per cent increase in the mortgage rate to 5.25 per cent, the same property has a net surplus income of £949.

Paul Broadhead, head of mortgage policy at the Building Societies Association, notes this is just a projection, but it does indicate a sharp reduction in income for landlords.

“Whether the consequence of all this is that we see buy-to-let landlords increase rents, reduce their portfolios to reduce their overall borrowing or set up limited companies to purchase properties, remains to be seen.”

The change in taxation is a more significant development for accidental landlords than regulation of consumer buy-to-let, according to Roland McCormack, TSB’s mortgage intermediary director.

Tighter taxation of landlords points towards more government involvement in the buy-to-let sector, with Mr McCormack explaining that the impact of changes will vary depending on the motivation of the borrower.

“The typical small landlord invests as an alternative to a pension, is often a long term property holder and is therefore more concerned with capital growth than maximising short term income.

“For larger investors the impact could potentially be bigger, though this will depend on how the borrower seeks to structure their portfolio.”

Paul Clampin, chief lending officer of Landbay, says these changes will inevitably make consumers, and especially accidental landlords, think more carefully before committing to buy-to-let.

However, he says this effect is unlikely to be dramatic, as many professional landlords already hold their buy-to-let portfolios in limited companies, where there are no plans to change taxation.

But Andrew Turner, director at Commercial Trust, says a number of landlords currently on the basic tax band will be pushed into the higher brackets by this tax change. He added that landlords are being advised to take steps now to help protect their investments.

Another rule change that the buy-to-let sector faces is the Immigration Bill 2015 to 2016, which will make it a criminal offence to let out a property to those who cannot live in the UK as a result of their immigration status, meaning landlords will be required to carry out new ‘right to rent’ immigration checks on their tenants.

In addition, the Let Property Campaign from HM Revenue & Customs is running until 2017, which grants an ‘amnesty’ period during which landlords can disclose the details of any tax they owe on their letting income without fear of prosecution.

However, if the deadline passes and they are not compliant, they will be fined.