insideKENT Magazine Issue 60 - March 2017 - Page 153

BUSINESS PROPERTY INVESTORS: MORTGAGE RATE RELIEF WILL BE ABOLISHED BY APRIL BY RICK SCHOFIELD OF WILKINS KENNEDY IN RECENT YEARS, THE GOVERNMENT HAS ANNOUNCED SEVERAL CHANGES TO THE WAY INVESTORS IN RESIDENTIAL PROPERTY WOULD BE TAXED. HIKES IN SDLT FOR SECOND HOME OWNERS, ABOLISHMENT OF THE WEAR AND TEAR ALLOWANCE AND NOW, FROM APRIL 2017, LANDLORDS WILL NO LONGER BE ABLE TO CLAIM TAX RELIEF ON THE INTEREST THEY ARE PAYING ON MORTGAGED BUY-TO-LETS. IF THIS APPLIES TO YOU, THEN NOW IS THE TIME TO GET PLANNING, IF YOU HAVEN’T ALREADY DONE SO. WHAT YOU NEED TO KNOW Currently, if you have a mortgage on a buyto-let property, then you can offset the full finance costs related to the purchase of your property, such as loan interest and arrangement fees, when calculating your profits against rental income. The relief will be at your marginal rate at either 20%, 40% or 45% – so you would pay tax on the profit according to your income tax band. From April 2017, new rules restricting tax relief on mortgage interest will be phased in over four years as follows: • 2017-18 – deduction from property income will be restricted to 75% of finance costs, with the remaining 25% available as a basic rate ‘tax reducer’ • 2018-19 – deduction from property income will reduce to 50% of finance costs, with the remaining 50% available as a basic rate ‘tax reducer’ • 2019-20 – deduction will fall to 25%, with the remaining 75% available as a basic rate ‘tax reducer’ • 2020-21 – there will be no deduction from property income for finance costs, with 100% available as a basic rate ‘tax reducer’. HIGHER RATE TAXPAYERS This means that from April 2020, taxpayers in the 40-45% tax bracket will see a direct increase in their annual tax bill – because all finance costs will get relief at the standard rate. Assuming you are a 40% taxpayer and your property portfolio is worth £500,000, furnished, with 50% debt and 4% interest on that debt, and a rental yield of 6.5%, tax would be liable on £32,500 of profit by 2020, as opposed to the current £22,500 in 2016/17. The net tax bill would be £11,000 compared to £9,000 in the current tax year, reducing the residual post tax funds by £2,000. For some taxpayers the situation could be much worse and lead to an unsustainable position where the tax is higher than the profits generated. This will be most problematic where the taxpayer is very highly geared. The National Landlords Association predicts that landlords paying higher-rate tax will see yields fall from an average of 4.9% to 4.3% as a result of the rate relief abolishment. RINGING THE CHANGES For landlords planning ahead and looking at the sums there are some things you can do to mitigate impact of the new changes. Review any plans and projections for income and profit, making sure they are still on course for an acceptable return. If not, then you could consider implementing a few changes of your own to help keep any risk at bay. Simply increasing rents might seem an obvious solution – but in a competitive market this might not be the right option for many people. Therefore, you could consider reconciling the differences from the other end, perhaps consider scaling back on non-essential debt funded refurbishments as these can quite often amount to higher rents. But, landlords need to get the balance right to make sure the costs are justified for the return. If a landlord’s spouse is not working, then transferring the rental income to take advantage of the spouse’s tax allowance might help. You could also consider opening up a company and investing in properties that way, or it may be that selling an element of the portfolio or restructuring the debt may be required, but before making decisions like these, I’d recommend contacting us in order to explore every option available to you. Wilkins Kennedy has a vast amount of experience in dealing with landlords and has accumulated extensive local market knowledge. Why not contact us at our offices in Ashford, Canterbury, Maidstone, Orpington or Sandwich to see how we can help. For more information about investment property taxes, email Rick Schofield at or call on 01233 629255. 153