Landlords told to be aware of tax restrictions

Buy-to-let landlords should pay close attention to tax rules coming into force for residential property in April 2017, or they could face serious consequences.

That is the view of London Chartered Accountants Blick Rothenberg, who have moved to stress the potential costly future facing landlords.

Changes

These tax changes were announced during last year’s Summer Budget, but HMRC only issued guidance on them on Thursday.

The additional 3% stamp duty surcharge has been prominent in the buy-to-let sector, but the restrictions in mortgage interest tax relief could have far-reaching consequences.

Mortgage interest tax relief will limit the amount of interest a residential landlord can deduct to calculate their income tax liability. These restrictions are coming into force in April 2017, being phased in over 4 years until it takes effect in April 2020.

Awareness

Nimesh Shah, partner at Blick Rothenberg, noted, ‘investors in residential property need to be aware of this marked new change and need to start planning for their portfolios now. Whilst the additional 3% SDLT has created the most anxiety amongst buy-to-let investors, the restriction to interest relief may have been overlooked, but this is likely to have greater longer-term effect on after tax returns.’[1]

HMRC say in their latest guidance that ‘all residential landlords with finance costs will be affected, but only some will pay more tax.’  The statement is quite misleading as the changes could have quite far reaching effect, which most buy-to-let landlords will not appreciate,’ he added.[1]

Landlords told to be aware of tax restrictions

Rises

Shah went on to note that, ‘A number of individuals have picked up a buy-to-let property in recent years, whether that is an investment property to supplement earnings, a second home which is occasionally rented out or a property which they have inherited and decided to let out.’[1]

‘It is wrong for HMRC to say only some will pay more tax, as entitlement to child benefit, personal allowance and the pension annual allowance will all be affected indirectly through how this new measure operates in practice.  It would also not be an unreasonable assumption to say that the majority of buy-to-let landlords will be higher or additional rate taxpayers and they will be affected without question.  This change will capture a large proportion of the buy-to-let landlord population.’[1]

Impact

When the measures were announced in the Summer Budget, the measure was described as limiting interest relief at the 20% basic rate. However, the actual workings of the restrictions will have a larger impact.

Mr Shah explains, ‘Currently, buy-to-let landlords can deduct all their interest cost to calculate rental profits.  When the new measure takes full effect, the interest cost will be completely disallowed in computing rental profits and instead a tax credit equal to 20% of the interest will be given against the person’s income tax liability. Whilst this may sound like what the Government intended the measure to achieve, the fact the interest is completely disallowed means the individual will have higher overall taxable income.’[1]
‘This could push an individual into a higher rate of income tax (40%/45%), start to reduce their personal allowance (if their income now starts to exceed £100,000), affect their entitlement to child benefit and restrict the amount on which they can claim tax relief for pensions.’[1]

[1] http://www.propertyreporter.co.uk/landlords/landlords-urged-to-pay-attention-to-changes-in-residential-property-tax-rules.html