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 rick . schofield @ wilkinskenney . com or call on 01233 629255 .
www . wilkinskennedy . com
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