Buy To Let Mortgages – Recent Tax Changes
How To Cope With The New Buy To Let Tax Relief and Stamp Duty Changes
If you were thinking of starting up or expanding a property portfolio in 2016 no one would surely blame you for now thinking twice given two recent interventions into the market by a Government deeply concerned with keeping a lid on property price inflation.
The Chancellor George Osborne has announced that tax relief on buy-to-let mortgage interest payments would be cut from April 2017 (it’s a phased change through to final implementation in 2020) and then added the double-whammy of a Stamp Duty Surcharge on Buy to Let and Second Homes. This type of transaction will, from 1st April 2016, incur an extra 3% stamp duty.
Up until now Landlords have been able to claim back tax relief on the interest they pay on their Buy to Let mortgages. The relief is applied at your marginal rate of tax. This means that if you are a basic rate taxpayer you would get 20% tax relief, higher rate taxpayers 40% relief and top rate tax payers a whopping 45 per cent.
The changes mean that regardless of your marginal rate of tax you will now receive a “tax credit” to the value of 20% of your mortgage costs to offset against income tax.
When the changes come into force those Landlords on higher incomes could find themselves significantly worse off. Smith & Williamson has calculated that any higher-rate taxpayer landlord whose mortgage interest is 75% or more of their rental income, net of other expenses, will see all of their returns wiped out by 2020. This is because Landlords will be effectively charged on turnover rather than net profit.
So what can you do to combat this?
The obvious answer would be to increase the rent you charge (or were planning to your charge) to your tenant. This is after all what happens when businesses overheads go up (e.g. when their suppliers put their prices up or regulatory fees increase), the costs are simply passed down the line to the consumer. But what if your tenant can’t afford an increase or that increase makes your property no longer desirable?
One thing you can certainly look at is trying to get a better deal on your mortgage if you can.
Thousands of UK Landlords are paying over the odds on standard variable rate mortgages when they could potentially remortgage away to another Lender for a cheaper deal or even approach their current provider for a “product transfer”. Because Landlords view mortgage payments as something their tenants are essentially paying for them they don’t always think to shop around for a better deal in the same way they would do on their main residential mortgage.
Keeping your mortgage under constant review and shopping around every time your deal expires can save you literally thousands of pounds over the term of your mortgage but it is important to consider what fees you have to pay to remortgage as there are fewer fee-free Buy to Let remortgage deals available than residential ones.
Another thing you could do to reduce the impact of the tax regime changes is to consider placing your existing property portfolio (if you have one) into a Limited Company or “SPV” (Special Purpose Vehicle). Your Limited Company would pay corporation tax rather than income tax on your profits.
One of the problems with this however is that many Buy to Let mortgages are only available to individuals so you might end up with a less competitive mortgage. That said, having a Limited Company set up may allow you to pass on your portfolio to your children further on down the line by adding them as shareholders in the future.
If your spouse pays a lower rate of tax, you could transfer ownership of one or more properties to them as long as this does not lift them into a higher tax band of course.
In terms of the Stamp Duty changes, talking to some of my Landlord clients they see this as a simple “tax grab” which is an annoyance for them but they say they are unlikely to stop investing. Professional or semi-professional Landlords tend to be in it for the long-term and paying a few thousand pounds more in tax at the outset will not put them off their future plans.
It’s probably inevitable though that the Buy to Let market will cool off over the coming months as Landlords become accustomed to the new tax changes and there will certainly be plenty of purchase completions rushing through prior to the 31st March 2016 to avoid the Stamp Duty surcharge.
Mortgage Broker Sheffield
If you would like to look at remortgaging your buy to let property then please contact us we will be happy to help!
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