Tax, tax, tax, tax, tax…. Is a landlord tax bill of 66% really a possibility?

Over the past year, the government clampdown on the buy-to-let sector has continued to throw doubt into the minds of investors about the viability of making a decent return on buy-to-let investments. Landlords tax bills are rising and new laws designed to protect tenants – such as the Right to Rent scheme – no doubt cause more headaches, more time and as a consequence more money, when trying to let their properties. So what has happened and where are we now?

To summarise, prior to 2017, landlords were only liable for income tax on their net rental income. So the interest was deducted from the mortgage along with other expenses incurred.

But then the Autumn 2017 Budget was announced. The big headline for landlords being that the calculation of tax on rental income was changing; landlords no longer receive tax relief on mortgage interest and are no longer able to deduct mortgage expenses from rental income to reduce your tax bill. Instead, a 20% tax credit was to be phased in over four years (completed in 2021) in line with a reduction in mortgage interest tax relief. So in 2017-18 tax year you can claim 75% of your mortgage tax relief, in 2018-19 50% and in 2019-20 25%.

Other budget announcements affecting landlords included:

  • Stamp duty changes – largely focussed on encouraging first time buyers onto the ladder, stamp duty is to be abolished up to £300k.
  • Capital Gains Tax –  a 30-day payment window is deferred until April 2020.
  • Empty homes premium – local authorities may increase council tax premiums from 50% to 100% on empty homes.
  • Long-term tenancies – the RLA proposed incentivising long-term lettings and the government agreed to dig into the concept with a follow-up consultation.
  • Rent-a-room relief –  a review will be conducted of how this is being used with a view to further encouraging long-term tenancies
  • Rent payments – a welcomed proposal that would see first-time buyers’ previous rent payments included in credit scores and mortgage applications.

But it was a the tax relief changes that made investors take a sharp intake of breath. To illustrate the implications, Which provided a table that broke down what a high-rate tax paying landlord would be liable for under the new regime, on a £950 pcm rent / £600 mortgage:

landlord tax calc

I think it was hoped that some of the aggressive measures clamping down on the private rented sector might have been eased in Philip Hammond’s Spring Statement 2018, but seemingly not. So the upshot is that property investors will be taking a big hit in their tax bill. The big shocker is how much. I have just read that for higher rate taxpayers, Accountants Blick Rotherberg have estimated this could equate to a tax bill of 66% for some investors.

As a result, some landlords will immediately look to increase rents to claw back some of that loss, but what does that mean for a rising risk of non-paying tenants due to affordability?

Another increasingly popular method of minimising tax liabilities appears to be landlords operating as limited companies, but that in itself presents different tax challenges.  

The Chief Executive of ARLA Propertymark, David Cox, said that “we need more homes available to rent, and the only way this will be achieved is if the government makes the market more attractive for buy-to-let investors”. Absolutely right in my view. The tenant market is so strong in Medway that it is a huge shame if investors are put off as result of increased taxes and a resultant reduction in profit.

Has this affected your thoughts on investing? If you are happy to share your views with me, I’d love to hear from you…

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