Landlords are being urged to act now so they can limit the amount of additional tax they’ll have to pay from April 2017 when changes to landlords’ income tax are introduced.
The government has at long last published guidance on how the changes, announced by former Chancellor George Osborne last year, will work.
You can read the guidance to the changes here, but essentially they mean that, from April 2017, landlords will be taxed on their rental income before the deduction of mortgage or loan interest payments.
How will this impact tax credits and other benefits?
They will then receive a tax credit for the interest payments, but for higher rate tax payers this will be gradually reduced down to the basic rate of income tax by 2020.
What this means is that many landlords with loans will pay more tax and, if you’re currently a lower rate tax payer, you might be bumped into the higher tax bracket and lose some means-tested benefits, including child benefit, too.
There’s been a lot of talk since the changes were announced of landlords pushing up rents to compensate for the additional tax, but this might not be realistic in areas where the market can’t sustain a rise. One solution is to reduce the costs of finding tenants for rental properties.
Here are some tax advice to help you minimize the effect of the new tax rates
However, there are other steps you might be able to take to avoid or reduce the additional tax:
- Consider setting up a company to buy property as these will still be allowed to claim full tax relief on interest payments after April 2017. However, you should take advice from a tax consultant before going down this route as it might not be the best option for you, depending on your individual circumstances.
If you already own a Buy To Let as a private individual, you could transfer it to a limited company but you might have to pay capital gains tax on the difference between the original purchase price and its current value as you will be effectively ‘selling’ it to the SPV (Special Purpose Vehicles). The company will have to pay stamp duty too as it is ‘buying’ the property from you.
Note that if you are switching ownership of a property you might have to change your mortgage provider and company mortgages are harder to find and tend to charge a higher interest rate.
- If you’re a higher rate or additional rate tax payer, or these changes risk tipping you into the higher tax bracket, and you own the property with a lower rate tax payer, you can transfer more of the rent to them to limit your overall tax bill.
Married couples who jointly own rental property will need to obtain a Form 17 from HMRC to “declare their beneficial interest in the joint property income” if they want to avoid automatically being taxed on a 50:50 split.
However, changing the split could have implications on other taxes, such as capital gains tax and inheritance tax, so you should take advice from a tax expert beforehand.
- Switch to fully furnished holiday lettings. These are exempt from the tax changes so you can still claim full mortgage interest tax relief. In order for your property to qualify as a holiday let, it must be available to let for at least 210 days a year and it must be actually let for at least 105.
Obviously, this only makes sense in areas where there is high demand for short-term or holiday accommodation.
Make sure you check with your local authority to see if any special rules apply to holiday lets in your area as you might need planning permission.