In a guest post, Lucy Dunn of Letproof.com explains all you need to know on the upcoming changes to Mortgage Interest Tax Relief:
‘Landlord or tenant, unless you’ve been living on Mars over the past year or two, you’ll be aware of some imminent changes to mortgage interest tax relief, even if you’re not really sure what they are! If you’re a landlord or a tenant, this will likely affect you so it’s time to pay attention!
George Osborne caused quite a stir with his Summer Budget in 2015. Although neither updated, bettered or thankfully for landlords, made any more severe, in the Spring Budget 2017, these 2015 announcements still come into play next month, on the 6th of April.
What are the changes?
In a nutshell, landlords will no longer be able to offset the cost of their mortgage interest from their rental income when calculating profits.
Landlords have already endured the 3% surge on stamp duty changes, now both landlords and tenants alike are waiting to see what effects they may feel from these tax relief changes. For informed landlords, there should be little surprise. With calculations made and any looming losses tallied, many will by now, for better or worse, have their ducks in a row. For tenants, informed or not, the concern is that any cost incurred to the landlord through an increase in tax, will be passed on, at least in part, to the tenant as a rental increase.
For a proportion of Landlords, there will be little change. The Government body anticipate “that 1 in 5 individual landlords will receive less relief as a result of this measure”, meaning 4 in 5 should not receive less relief.
The issue? When a landlord’s income takes them into a higher tax band.
Now unable to offset interest from income, profits become higher, which is bumping some landlords up into the next tax bracket; basic rate taxpayers shouldn’t be affected unless this happens. Higher rate taxpayers however will be and if mortgage interest is 75% or more of their income, by 2020, returns will be wiped out. Similarly, additional rate taxpayers with interest equalling 68% of income will see their returns wiped out.
Weigh up your options
While no one welcomes increased fines, changes and surges, surely there are some options available for the proactive or reactive landlords to keep their own costs down and therefore not pass costs on to tenants?
Limited Companies; This has been touched on, discussed and put into action by some already. As Limited Companies owning properties will not be affected by the changes to mortgage income tax relief, many buy-to-let landlords are setting themselves up to operate as a Limited Company.
Transferring to a spouse: A landlord may wish to transfer their property to a spouse or partner, to lower themselves out of a higher tax bracket, however this may, 1) raise the spouse’s income or, 2) may lead to costs outweighing the benefits of the transfer of ownership. In both of the above cases, the government will count any transfer of ownership as a sale; meaning capital gains tax could come into play.
Be informed and aware of implications if looking into either of these options to ensure you will in fact be making an overall positive financial decision.
Landlords, learn how these mortgage interest tax relief changes will affect you now, so you can proceed with any changes you wish to take, to outweigh cost increases, before April 6th 2017.’