What is the new tax legislation for landlords as of April 2017?
New tax legislation for landlords.
Landlords of residential properties usually get a tax relief for financial costs, this tax relief will be restricted to the basic rate of Income Tax, starting from April 2017. The changes will affect you as a landlord if you let residential properties, whether that is as an individual, or in a partnership or trust. They will also change how you receive relief for interest and other finance costs and will be gradually introduced over 4 years from April 2017. It will be phased in like this:
New tax legislation for landlords.
• in 2017-18 the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining being available as a basic rate tax reduction.
• in 2018-19, 50% finance costs deduction and 50% given as a basic rate tax reduction.
• in 2019-20, 25% finance costs deduction and 75% given as a basic rate tax reduction.
• from 2020-21 all financing costs incurred by a landlord will be given as a basic rate reduction.
Costs for finance will not be taken into account when working out taxable property profits. Instead, once the income tax on property profits and any other income has been assessed, you income tax liability will be reduced by a basic rate tax reduction’. The finance costs that will be restricted include any interest on mortgages, loans and overdrafts and can also include alternative finance returns for example.
You will be affected by new tax legislation for landlords if you are a resident of the United Kingdom and you let out residential properties in the UK or overseas, this also applies to those who let residential properties in the UK but are not a United Kingdom resident. The change will also affect individuals that let such properties in partnership. Trustee’s and beneficiaries are liable for income tax on the property profits. The only way that this change will not affect you is if you are a United Kingdom resident limited company, if you are a non-UK resident limited company or if you are a landlord of furnished holiday lettings.
How the new tax legislation for landlords is worked out is that the reduction is the basic rate value of the lower of finance costs (costs not deducted from rental income in the tax year, property profits (the profits of the property business in the tax year and adjusted total income (the income that exceeds your personal allowance. If the basic rate tax reduction is calculated using the property profits or adjusted total income then the difference between that figure and finance costs is carried forward to calculate the basic tax reduction in the following years.
This change aims to remove landlords’ ability to deduct the cost of their mortgage interest from their rental income when they calculate a profit on which to pay tax, meaning that tax will be payable on non-existent income.
If you are a higher-rate taxpayer, the new tax will wipe out your returns if your mortgage interest is 75% or more of your rental income. The tax liability if a basic-rate taxpayer is uncharged. However, the new profit calculation could push a basic-rate taxpayer into a higher tax band. If you have properties that have significant mortgages of loans you will likely be paying an increasing amount of income tax from April 2017.
Landlords have many concerns with this new change coming about. Firstly being that after a survey of 1,200 landlords, currently paying the basic rate of income tax, over 60% of them said that the changes would force them into a higher tax bracket, even though their income hadn’t increased, therefore leaving some landlords renting at a loss, pushing them to leave the market, resulting in a reduction in the supply available property to rent. This will also deter landlords from investing in the new homes that are desperately needed to meet rising demand, further reducing supply.
The new tax legislation for landlords also discriminate against UK landlords in favour of overseas landlords who choose to let properties in the UK, as the new tax measures do not apply to them. It is also likely that there will be an increase in rents due to the extra costs and shortage of properties. It is ultimately tenants who will suffer as they face increased difficulty in obtaining decent and affordable housing.
For some landlords, their investment in property is a side job in addition to their day job and investment for the future. For others, it’s a full time job where they receive the entirety of their income. So what can they do? Landlords are currently faced with the following options, they can either increase the rent of the properties that they let out, to cover additional costs and reduce investment in properties to protect profits. Landlords also have the option to sell of their properties, a lot of whom, will not wish to do so. Landlords can also set up limited companies through which to manage the properties, as limited companies are not affected by the new tax change. The benefits of doing this includes the fact that limited companies can still offset mortgage costs and there are potential tax credits and tax gains for limited companies. Another benefit is that the finances for your company are separate from those as an individual. However, there are some downsides to this option, for example how legislation around limited companies and offsetting of mortgage costs could change at any time and also with the stamp duty, capitals gains tax and other costs are potential deterrents.
For further individual advice, call our office on 01273 911213 or visit our offices in Hove. Or for an email contact, visit our contact us page here. We look forward to hearing from you and helping all landlords, property buyers and holiday lets.