Rents will rise as result of tax relief changes

New research conducted from online letting agent Upad has revealed that a number of buy-to-let landlords are still unaware of the alterations to mortgage interest tax relief.

20% of landlords were alarmingly oblivious to the fact that they could have to pay more money in tax as a result of the alterations. In addition, 47% have no clue have much more tax they could be paying in 2020, when the alterations to mortgage tax relief have been completely phased out.

Tax Relief Changes

Previous rules that allowed landlords to offset all of their mortgage interest against tax is being phased out during the next three years.

Once mortgage interest has been withdrawn by 2020/21, the consequences of Section 24 will mean that landlords will only be able to claim back a basic rate of 20% from their tax bill. As a result, their rental returns will be hit.

In addition, the research reveals that one in five landlords plan to raise rents in order to mitigate the cost of the new bill. This of course means that tenants could face a potential rise in rents as a result.

James Davis, CEO and founder of Upad, noted: ‘Higher tax will mean lower profits for many landlords, which is why some are warning that rents will have to rise this year. However, rent rises are likely to be deeply unpopular with tenants so landlords will need to think about adding some cost-effective, tax deductible improvements to their properties that justify asking for an increase. For instance, by providing complimentary Wi-Fi, upgrading the appliances or giving the kitchen or bathroom a makeover.’[1]

Rents will rise as result of tax relief changes

Reductions

For those landlords affected by the changes but yet to do anything about their future, there is still time, according to Davis.

‘You may need to sell off some low-yielding property, reduce some of your mortgage payments or change the ownership of your portfolio to protect the profitability of your business. Options include setting up a company to buy property or if you already own a rental property as a private individual, you could transfer it to a limited company,’ he observed.[1]

‘If you’re a higher rate or additional rate tax payer, or these changes risk tipping you into the higher tax bracket, and you own the property with a lower rate tax payer, you can transfer more of the rent to them to limit your overall tax bill. Another option could be to switch to fully furnished holiday lettings as these are exempt from the tax changes so you can still claim full mortgage interest tax relief,’ he concluded.[1]

[1] https://www.landlordtoday.co.uk/breaking-news/2017/4/lower-profits-for-many-landlords-mean-rents-will-have-to-rise-this-year