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April 13

2017
by mydeposits
Taxing times for landlords. Tax changes could be pushing you up a tax bracket.

National Landlords Association Logo

The tax changes that began on 1 April 2017, and are phased over the next few years, are set to have a significant impact on landlords.

 

Our guest blog is from our partner, the National Landlord Association, and explains these important changes.

 

Who is affected?

The changes will affect all landlords with finance costs associated with letting their properties, although in this blog we refer primarily to mortgage interest costs, because buy-to-let borrowing is the most prevalent source of finance in the sector.

 

What’s changing?

You’ve probably heard by now, but when calculating your taxable profit your ability to deduct finance costs from your rental income/ turnover is being phased out over the next four years. Instead you will be able to claim just 20% of your finance costs as a tax reduction.

Until 6 April 2017 you were able to deduct your mortgage interest costs from your rental income before declaring your profit to the taxman. But by the time we reach the 2020-21 tax year you will no longer be able to do this. Instead, you will receive a tax reduction to your final tax bill, the equivalent of 20% of your mortgage interest costs – regardless whether you are a higher rate tax payer.

 

Are the changes immediate? 

The changes aren’t being introduced immediately, and will be phased in over the course of the next four years.

  • Year 1: Current financial year (2017-18): This year you can deduct 75% of your mortgage interest costs from your rental income before declaring your taxable profit. The remaining 25% of your mortgage interest will then be used to calculate a tax reduction (equivalent to the basic rate of Income Tax of 20%) which is then applied to your final tax bill.
  • Year 2: 2018-19: Next year, the split will be 50% deduction and a 50% reduction.
  • Year 3: 2019-20: In year three the split will be 25% deduction and a 75% reduction.
  • Year 4: 2020-21: …until finally, by year four you will no longer be able to deduct any of your mortgage interest costs and receive only the tax reduction.

The NLA predicts that almost half a million landlords who currently pay the basic rate of tax will be forced into a higher tax bracket as a result.

 

What are my options?

There are a few options for landlords who will be hit by the changes:

  1. Incorporate: many landlords have taken this action already, but sadly the costs involved mean it isn’t an option for everyone.
  2. Raise rents: faced with an increasing expense of providing housing many will have to raise rents in order to cover costs.
  3. Sell up: Many landlords will not be able to absorb the increased costs and will need to sell. There’s already evidence of this happening.

 

Further changes announced by the government.

In addition, some sections of the Housing and Planning Act 2016 which aim to crack down on “rogue” landlords came into force this month (6 April). 

The government also chose to publish the long-awaited consultation on an English letting fees ban.

Here is a brief overview of what “rogue” landlord measures came into force:

  • Civil Penalties:

Councils are now able to impose fines of up to £30,000 as an alternative to prosecution for a range of housing offences. They will be able to retain all of the income to make sure it is used for private sector housing enforcement purposes. They are not retrospective and cannot be imposed on offences committed before commencement.

Local housing authorities will be able to impose a civil penalty as an alternative to prosecution.

You can read the Statutory Guidance for Civil Penalties here.

  • Extended Rent Repayment Orders:

Rent repayment orders, which can be issued to penalise landlords managing or letting unlicensed properties, have also been extended to cover a wider range of situations.

You can read the Statutory Guidance for Rent Repayment Orders here.

 

For more information on tax changes over the coming year listen to our expert podcast here. 

 

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