While many landlords and property investors have been focusing on the stamp duty changes which come into effect from the 1st of April, there may be a bigger problem looming for people that are involved and invested in the buy to let market. The reduction in tax relief on buy to let mortgage interest payments may not be due to come into being until the 1st of April 2017, but it is an issue that is likely to have a huge impact on many property owners.
At the moment, buy to let investors have been able to claim for a tax relief on the interest payments for their mortgage and this has been at the marginal rate of tax. The basic taxpayer has been able to claim a 20% tax relief but people on a higher rate have been able to receive a 40% tax relief. Investors who are on the top-rate of tax have been entitled to a 45% relief on their mortgage interest payments.
From the 1st of April 2017, this tax relief changes to a flat rate of 20%. For landlords who are on the basic rate, there will be no change, but investors who have a higher level of income will end up losing out on a lot of money every single month.
Profits could be badly affected
This sounds bad in theory, but when you actually calculate the figures, it is easy to see why many landlords have grave concerns over their long term ability to turn a profit from their property. A major building society ran some figures and they calculated that currently, a landlord with a £150,000 but to let mortgage for a property worth around £200,000 would be able to charge a monthly rental fee of £800 and this would bring in a net profit of £2,160 every year.
For a landlord on a higher tax rate, the changes will see their net profit fall to £960. Dropping £1,200 every year on a single property is a big concern for landlords. You can see why someone with a portfolio of properties, which perhaps makes them more likely to be in the higher tax brackets; will lose a significant level of profit, without gaining any more time or shedding responsibilities.
It should also be pointed out that some industry experts have suggested that the future may be even gloomier for many landlords. Any landlord with a long-term fixed rate, which is usually at a higher level, may find that the profits obtained from their landlord duties could be comparable with those expected from a savings account.
This factor and the new stamp duty charge mean that there is a lot to think about and existing and new landlords will need to weigh up their options before investing. However, this has always been the case and there is still going to be a demand for rental properties and ways for landlords to make a profit.
Even at this stage there are solutions you can consider to minimise any impact on your net profits and as we move closer to the implementation date, it is likely that there will be other solutions to protect your investment and property portfolio. Options include:
- Switching to a shorter term fixed rate mortgage to obtain a lower rate of interest
- Placing your property portfolio into a limited company set-up, which enables you to pay corporate tax rather than income tax. This will help you to pay a lower amount
- If your spouse is on a lower rate of tax, ownership could be transferred to them, and if this doesn’t push them into a higher tax bracket, you will benefit
This is an issue that impacts on buy to let investors across the United Kingdom, and it will affect people operating in the Stockport area. You can rest assured that we will be happy to advise you on your situation and on what is the best strategy for you to take to protect your investment. If you would like to discuss what these changes will mean to you, please arrange an appointment and we will be happy to help.
https://www.spencerharvey.co.uk