How the New Tax Restrictions Affect Landlords

Published: 12/10/2017

In April of this year, the tax changes which were announced previously for Landlord’s Tax Relief began. The changes will actually take place over a period of four years and tax relief will now be restricted to basic rate income tax.

Whereas before the finance costs of Landlords were taken into consideration to work out profits, now they won’t. Instead, the income tax on your profits from your property(and any other sources you have) will be assessed and your income tax liability will be reduced by the basic rate. This will change how you receive tax relief for interest and any other finance costs.

Landlords who will be affected by the change are those who:
• Live in the UK and rent out property in the UK or abroad
• Let out properties in a partnership
• Are liable for income tax on the profits from a property rental you manage as a trustee or beneficiary
• You live abroad, but you rent out property in the UK

However, if you are a UK or non-UK resident company, or the landlord of a furnished holiday home you let out for profit, you won’t be affected.

Previously interest relief was available on mortgages, loans and overdrafts, but this will now be restricted. Over the next four years, the percentage of finance costs deductible from rental income will decrease from 75% in 2017-2018 to zero by 2020-2021.

Meanwhile, the percentage of basic rate tax deduction will rise from 25% in 2017-2018 to 100% in 2020-2021.

There are things you can do to avoid the restrictions, however, one way is to increase the rents on your property. The risk with this is that it might end up with you losing a good tenant if they decide they can’t afford a rent rise.

Another way is to convert your interest only mortgage into a conventional payment mortgage which you could do with all or part of the mortgage.

If you are in the process of buying a buy to let property now then there is a third solution. You won’t be able to do it if you already have properties, but if you are a new landlord or you are buying new properties to add to your portfolio you can set up a limited company.

Setting up a company means you need to think of a company name, appoint at least one director and one shareholder, which can be the same and then register your company with Companies House. Once your company has been registered it will be liable to pay corporation tax and you must register (you can do it online) within three months of the company’s formation.

The benefit of a limited company is that profits from your property rental will be taxed at 20 percent if your profits are less than £300,000 a year.