The recent changes in the Summer Budget to tax relief for buy-to-let landlords have the potential to significantly reduce after tax rental yields. In summary, from April 2020,
- Tax relief for landlords on mortgage interest payments fall
- A landlord will only be able to claim the basic rate of tax – 20% rather than 40%/45%
- Put simply, the after tax cost of a £100 interest payment will increase from £60/£55 to £80
- As an example, the after tax cost of a £100,000 buy-to-let mortgage with a 5% interest rate, will increase by £1250 for a 45% tax payer and £1000 for a 40% tax payer per annum
This change will be phased over a four-year period from April 2017 and will affect a 40%/45% landlord who has a sole buy-to-let property and large portfolio landlords alike.
So, what action can a buy-to-let landlord take – here are a few suggestions:
- Simplest strategy would be to increase rents, which could be the way that the buy-to-let sector adapts to the changes. However, increasing rents may result in more legislative restrictions to deter rent hikes.
- Use the next 4 years to restructure your loan portfolio and aim to fix interest rates for the longer term. In simple terms keep your interest costs as low as possible to reduce the impact of the changes. However, long term fixed rate deals are likely to be limited at the moment due to the prospect of interest rate increases in the medium to long term.
- Where possible, use your spouse’s personal allowance or 20% tax band.
- Become a company. The rule change does not affect property held via a company, also this would mean that you benefit from the reduction in corporation tax rates to 18%. But beware; you may be adversely hit by the recent changes in the tax treatment of dividends so you need to do a cost benefit analysis before taking the decision to incorporate. There is also the potential SDLT cost to consider.
- Re-assess your property holdings, it may be the time to sell your less profitable properties and refinance your remaining portfolio.
In conclusion, the Chancellor has given buy-to-let landlords for years to prepare for the changes, so make good use of them and assess your opportunities.
For further advice and assistance, you can call me at RAE Business and Property on 07587 709008. All initial consultations are on a free basis.