Buy-to-let landlords – are you facing a major tax hike?

If there’s one group of people who kept a keen eye on former Chancellor George Osborne’s budgets, it’s landlords.

Osborne had the hunch that property landlords were adding too much inflationary pressure to the UK housing market. So he put buy-to-let landlords in his sights and got to work reducing the income tax relief available to them. His reasoning was that, by levelling the playing field, people who want to buy their own home would be able to compete more effectively with buy-to-let landlords.

Whether that will be the case remains to be seen. But one thing’s for sure – his recent changes have teeth. Sharp teeth.

From 6 April 2017, landlords (subject to income tax on their letting profits) will gradually lose the right to claim a deduction for finance costs. These costs are primarily, but not limited to, mortgage or loan interest payments. Instead, landlords can claim a tax credit based on 20% of the disallowed costs.

The reduction is to be introduced in stages starting April 2017 and be fully implemented by April 2020. By this time, landlords will be denied higher rate tax relief on the soon to be disallowed costs.

The changes also have a rather insidious side effect. Under certain circumstances, basic rate taxpayers will find themselves promoted to the higher rate tax band, even though they will enjoy no increase in rental profits. Those most at risk are landlords who have borrowed heavily to grow their property portfolios and have high levels of rental income matched by high levels of finance costs.

So our advice to landlords is straightforward – start planning for these changes now.

If your circumstances have the most unfavourable combination of rental income to finance costs, the effects on your income tax liabilities could be dire. This point cannot be overemphasised. Even with no change in your property business profits, you could well experience significant increases in taxation.

If you are concerned that you may be affected, please call us today. We are happy to advise you how to structure your property portfolio in the most tax efficient manner whilst taking into account these latest changes.

Image source: Geograph.

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