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BTL mortgage tax relief changes - how to prepare

Posted on 2017-03-14

Changes to the way landlords can claim buy-to-let mortgage interest tax relief have been a long time coming. The proposal for the new system was first announced in George Osborne's Summer Budget on July 8 2015. The buy-to-let market’s gone through a lot of changes since then, but the introduction of the tax changes has rarely been in doubt.

Landlords have therefore had plenty of time to prepare for the restriction of mortgage interest tax relief, something which is set to significantly affect higher-rate taxpayers.

That said, for many landlords, their property isn’t their primary source of income and it’s not unreasonable to assume that a high proportion of those likely to be affected have spent the last year and a half focusing on their day-to-day lives, such as their work and family, as well as management of their property portfolios. And that's not to mention the various new regulations that have been introduced since the Summer Budget 2015, including Right to Rent, gas safety obligations and energy efficiency requirements.

And so, with the tax changes now less than a month away, we're providing a recap as well as four ways you can prepare for the new system, which is gradually being phased in over the next four years.

What exactly is happening?

From April 6, a reduction of buy-to-let mortgage interest tax relief will be phased in, gradually being reduced to the basic rate of income tax (20%) by April 2020. This means that in four tax years’ time, the ability of higher-rate tax paying landlords to deduct mortgage interest from their tax bill will have been halved.

It's important for landlords to remember that the reduction’s being phased in over the next four tax years. For example, in 2017/18 the allowable deduction from property income will be restricted to 75%. The following year (2018/19) it’ll be reduced to 50% and in 2019/20 it’ll be reduced by a further quarter to 25%. By 2020/2021, all landlords' finance costs will be claimed at a basic rate of tax reduction.

You can read HMRC's full guidance on the new system and we've also looked at the practicalities of the tax changes in more detail.

Five ways you can prepare for the new system

- Speak to an expert

The changes to mortgage interest tax relief are complex, and so speaking to an expert about your options and how you might be affected could be vital. Financial advisers, tax experts or accountants should all be able to help and if you haven't taken advice already, then now’s certainly the time to do so.

We previously spoke to landlord tax expert Simon Blum of OneE Group about incorporation and tax return, which you can read up on here and here.

- Consider your alternatives

There are several ways landlords can minimise the impact of April's tax changes - the most popular of which seems to be incorporation. In fact, according to Mortgages for Business, 69% of property purchase applications were made through a limited company structure in Q4 2016, up from 21% recorded before the changes were announced.

Incorporation is the act of transferring ownership of a property portfolio to a limited company, meaning you’ll only be liable for corporation tax and won't be affected by the impending changes to the system. See our previous point above, and please speak to an expert before considering taking this measure.

Other alternatives which would deem a landlord exempt from tax relief restriction are taxpayers who fall below the threshold for paying income tax, those who transfer the property to a spouse who doesn’t pay tax, or those who don’t take advantage of mortgage interest relief in the first place.

- Connect with other landlords

The UK's landlord community is vast (in the region of two million, the last time we checked). This means that there are plenty of landlords all around the country experiencing the same challenges. There are numerous forums and websites where you can interact with other landlords; sharing ideas and perspectives with others can be invaluable to progression and overcoming obstacles.

If you're not so keen on online forums; landlord associations, letting agents and other property firms frequently organise seminars and events where you'll be able to meet like-minded investors.

- Do your research and your reading

Alongside getting the viewpoint of experts and other landlords, it’s also crucial to do your own research. Resources covering the property market – and the rental sector in particular – are in plentiful supply these days.

Staying up to date with industry news and the latest Government legislation can help you to remain one step ahead of the market and ultimately contribute towards making your investment property as profitable and secure as possible.

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