2017 buy-to-let tax changes explained

This month, major new tax changes affecting buy-to-let landlords came into force.

• Top 4 considerations when buying a rental property
• Is being a landlord worth it? 63% of buy-to-let landlords recommend becoming one
• Best buy-to-let areas in the UK 2018
• Is buildings insurance a legal requirement?

The changes, originally announced in 2016 but now being phased in, have drawn the ire of landlords and property commentators, who have suggested that they will make it much harder for landlords to turn a profit.

It’s important that landlords understand the changes and, if necessary, take steps to mitigate them.

What are the buy-to-let tax changes for 2017?

The major buy-to-let tax change coming into force this month affects mortgage interest payments. In the past, higher rate taxpayers could offset these payments against their rental income before making their final tax calculation. From this month, this relief will be phased out, resulting in higher tax bills. Those bills will increase even if landlords’ rental income has remained static.

The first phase of the process has already begun, with landlords now only able to offset 75 per cent, rather than the full 100 per cent, of their mortgage interest payments. This phasing will continue until 2020, by which point landlords won't be able to offset any of their mortgage interest payments.

However, the change doesn’t only affect higher rate taxpayers. Once rental income has been taken into account in tax calculations, the change will push some basic rate taxpayers into the higher banding. Those at the lower end of the scale may also see their liabilities increase as some will no longer eligible for certain means-tested benefits.

How can I mitigate the tax changes on buy-to-let?

It’s important to understand that the change only affects landlords who hold their properties privately, rather than through limited companies. This gives landlords some scope to mitigate the tax changes from this month.

Many landlords have started to consider moving their properties into something termed a “beneficial interest company trust”, which some financial advisors said could help them reduce the impact of the changes. According to the firms promoting these services, properties could be moved into limited companies without the need to remortgage, by transferring only the beneficial interest and retaining the mortgage in the landlord's name.

The deal seemed attractive, because income would be taxed at the corporation tax rate, rather than the income tax rate. However, accountants have warned that there are significant risks associated with such a move, with HMRC on the lookout for signs that it is being done purely for tax purposes.

Other landlords have chosen to move their properties into more standard company structures to benefit from the lower corporation tax rate. There are still risks, though, primarily because this would require remortgaging, meaning that borrowers may lose out on existing cheap deals that they had previously secured.

What are my other options?

There are some other ways in which landlords may be able to at least minimise the impact of the changes. These include:

• Increasing rent. This is a risk that commentators have warned about, and will have knock-on effects for tenants’ ability to afford their outgoings. In some cases, landlords are choosing to increase their rents where possible in an effort to make up for losses incurred.
• Converting mortgages. Some landlords may be able to transfer their interest-only mortgage into a repayment plan, whether this be all of the remaining loan or a portion of it.

Should I consider selling up my buy-to-let properties?

The 2017 buy-to-let tax changes are the latest in a raft of new measures that many landlords see as an attack on the private rented sector. There have been suggestions that some landlords with smaller portfolios may consider selling up altogether.

Before considering disposing of properties, you should consider both your long-term goals and the current property market. If you have bought cheaply and have the opportunity to realise large gains, now may be a good time to sell. However, if your financial planning relies on steady rental income, and if you have secured reliable tenants, it may be better to weather the storm.

Finally, it is important that you take independent financial advice before taking any decision regarding your investment. If you are in any doubt, speak to a professional.

What do you plan to change, if anything, over the next 3 years? Let us know in the comments.