How landlords can prepare for the tax relief rule change
From April 2017, changes will begin to cut tax relief on interest payments for buy-to-let mortgages. The changes will be gradually made over four years, from 40% or 45% down to 20% in 2020.
The cuts will affect property investors, namely landlords, who will no longer be able to claim tax relief worth 40% or 45% of interest payments on mortgages for properties they own.
But while the cuts, announced in the 2015 budget, may be a bit of a bombshell for landlords, there are ways to lessen the financial impact.
Become a business
Registering a buy-to-let property as a limited company is a good way to reduce the impact of the cuts, as noted by property experts at accountancy firm PwC. This is because businesses are only taxed on their profits, not their income, meaning they don’t have to pay tax on their company property if they don’t make a profit.
It also means mortgage interest payments can be claimed on business expenses, which helps to reduce tax rates further. The tax relief changes role out just as corporation tax cuts – tax levied on company profits – come in – falling from 20% to 18% by 2020 – suggesting now is a good time to do this.
Remortgage your property
Remortgaging may also be a good way for landlords to prepare for the changes, as reported in Property Reporter and The Telegraph. Taking out a more favourable mortgage with another lender on a buy-to-let property can help turn losses, from tax relief, into profit. Remortgaging at under 4% on a typical mortgage, for instance, as opposed to 5%, could produce a substantial saving.
Raise your rent
Increasing rents for tenants is another way for landlords to overcome money lost through the tax relief cuts, as suggested in the Guardian and The Telegraph. Rent increases could also be made annually to fall in line with the four years in which the cuts are being implemented. News reports state nationwide rents will have to rise to deal with the cuts; that said, not all landlords just look to make a profit, and may want to avoid affecting their tenants if they can.
We suggest you consult your accountant in good time, so you can assess how the new rules will affect you and what you can do to protect your property portfolio.