The New Tax Year: Changes that you need to know

After last year’s increase in stamp duty for second home buyers, something that certainly hit the buy to let market, things have a been a little quieter on the tax and property front this year. Landlords are still finding their margins being squeezed, however, and there are some important legislative changes that came into effect on 6th April this year which could have a significant impact on the rental market.

The biggest issue is the reduction of tax relief that landlords will get on their mortgages, changes which are due to be phased in over the next four years.

Prior to April, landlords could get tax relief on their mortgage payments which meant they were able to offset those payments against their rental revenue. This change has been a long time coming – George Osborne first raised the issue back in 2015 when he was still chancellor and Philip Hammond confirmed its introduction in his last budget. Landlords who have already been stung by the stamp duty increase last year, are now trying to find ways lower their tax burden.

Tax relief is being reduced from 100% to zero gradually over the next few years and will be replaced by an overarching tax credit of 20%. This could mean that the tax owed by many landlords could increase significantly and, in some cases, reduce net profits by as much as 84%.

The worry for many in the industry is that buy to let landlords will start to feel the profits aren’t worth it and we may see considerable rent rises in some areas to compensate. Others say that it will benefit the market and create a more level playing field, particularly for those who are looking to buy for the first time.

For 2017/18, tax relief on mortgage payments will be 75%, reducing to 0% by 2020/21. This is undoubtedly going to affect those landlords who are currently making only a small net profit and could push them into a negative cash flow. Those who are in the higher rate tax band, or will be moved into it because of the changes, are likely to see an overall increase of their tax burden. Landlords who are lower tax rate payers will not see any change to their circumstances.

There are a few ways that landlords are now looking at reducing the impact of this change in tax relief. The first is to shop around for lower rate mortgages, which is still not easy in today’s climate. Another is to transfer ownership to spouses who are lower rate tax rate payers. The more popular option seems to be switching to a limited company structure – something that would lower tax paid through the reducing corporation tax rates but could also limit the availability of mortgages on the market.

The changes to tax relief are more likely to affect those landlords with larger portfolios and not those who have a single or just a couple of properties and remain at the lower tax threshold. For your average home buyer, the changes also might mean that more properties become available as the competition for buy to lets begins to decrease.

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