As we welcome (!) a new tax year, I’ve been reading up on what that means because – as always – there are more changes. The implications for buy-to-let landlords are considerable, although not unanticipated and there are also a few market legislation changes that I think it’s important to recap too. So here’s a run down of the key changes as far as I know.

Tax allowances and mortgage interest tax relief

The good news is that earnings will have to hit £12,500 before paying any tax, or £50,000 before hitting the higher tax bracket of 40%. But – as I highlighted back in my October article – mortgage interest tax relief reduces to 25% and landlords are no longer able to deduct mortgage expenses from rental income to reduce tax bills. Instead, a 20% tax credit has been phased in over four years (complete in 2021) in line with a reduction in mortgage interest tax relief. So in the 2017-18 tax year you could claim 75% of your mortgage tax relief, in 2018-19 50% and in 2019-20 25%. As of April 2020, there will be no mortgage interest tax relief at all. Instead, your interest payment will qualify for 20% tax relief. An example by Money Supermarket was a landlord getting £10,000 in rent and paying £9,000 in mortgage interest payments, will end up paying tax on the full £10,000. Although they would be able to deduct £1,800 from their tax bill due to the 20% tax credit.

Many landlords will find themselves paying more tax on their rental income, with some even changing tax bracket as a result, as the rental income previously used for interest payments must now be declared. That’s a big hit for higher rate taxpayers.

Other landlords are suggesting the change will lead to negative earnings as those who have smaller profit margins may find they are losing money.

The biggest concern for me is that so many landlords are still totally oblivious. I’ve met several portfolio landlords still completely unaware of these changes and it is going to shock them when they get their next tax bill.

Capital gains tax allowance

A small change in favour of landlords is a rise in the capital gains tax allowance rises from £11,700 to £12,000. Blink and you’ll miss it, you might think, but pennies make pounds and if you’re planning on selling an investment property this year, it could benefit you. Especially if jointly owned as you could earn up to £24,000 in tax-free profit.  

There are some changes afoot in relation to the rules around capital gains, that could also affect you if they are approved. Specifically if you lived in your property before renting it out. The proposal will mean that you can only let your property for 9 months after moving out before paying capital gains tax on a sale, which is half the current 18 months allowance. 

Letting fees ban

This legislative change is causing some furor with managing agents and landlords, as from June 2019 they will be banned from charging tenants any fees in relation to lettings. More on this to come on in my next article.

HMO licence check

Statistics indicate that there are still plenty of landlords who have failed to realise that they now need a licence following the HMO rule change in October 2018. Many rental properties were reclassified as Homes of Multiple Occupancy (HMOs) following the law change. The easiest thing to do if you are unsure if you need a licence, is to check with your local authority. And if you do and your property is in the South-East, my HMO specialist company Home-Share can help you with the application process.  

Protecting Client Money

As of 1st April 2019 all agents must have client money protection insurance, a government approved scheme to protect client money like tenancy deposits and rental income. Landlords are being encouraged to verify that their agent is covered when the scheme goes live in April.  

The result of more taxation changes?

I know that a lot of investors tried to circumvent the mortgage interest tax changes and reduce their impact by setting up their own limited company. But even that comes with a warning. I believe the process of transferring property ownership from yourself to a limited company could still count as a sale, which means you are subject to capital gains tax. The only way to be sure is to seek out expert financial advice.

My personal opinion is that the combination of the diminishing mortgage interest tax relief and more changes to capital gains tax allowance, will lead to more amateur landlords exiting the market as they don’t know how best to manage their investment accounts profitably.

Which will lead to increased opportunities for professional investors and those with good accountancy advice, which is what is key here. I am by no means a taxation expert, so I’d really welcome further clarity or details that can benefit my readers. Leave your comments below, call me 07944 726676 on or email me at hasan@homeshare.co.uk.

Hasan