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5 ways you can tackle Landlord tax

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Buy-to-let has proved an increasingly popular tax-efficient investment, delivering steady income and capital growth. As other long term savings, such as pensions have disappointed, buy-to-let loans have trebled since 2005.

 

However, the removal of mortgage interest tax relief begins this year and will affect hundreds of thousands of property investors. These tax changes, which come into effect from April 6th, will see landlords lose a quarter of their higher-rate relief each year until 2020, when it will be restricted to 20% on all mortgage interest. Nearly 1.7 million tenanted properties have been bought using a mortgage, with the associated costs offset against rents, bringing tax relief at the borrower's highest rate. This will now be phased out for 40% and 45% taxpayers.

However, there are ways this impact can be minimized. Here's what you can do:

1. Remortgage

If a buy-to-let landlord is paying 5% on a typical £120,000 mortgage, he might currently be earning rental income of £750 per month or £9,000 annually. After allowing for expenses, fees and mortgage interest, they are left with a £612 annual profit after tax.

However, when tax relief is reduced to 20% that profit turns into an annual loss of £588. By remortgaging at, say, 3.79pc with a five-year fixed-rate loan, the landlord can save £1,452 annually on their interest bill, turning that annual loss back into a profit of £574.

Without remortgaging, their bottom line could deteriorate further should interest rates rise. Should buy-to-let loan rates reach 7% by the time that higher-rate tax relief has completely disappeared in 2020, the overall annual loss would be £2,784.

So, buy-to-let landlords are likely to increasingly seek to reduce potential losses by fixing their rates longer, where possible. Unfortunately, whereas home buyers can borrow at 3% fixed for 10 years, comparable buy-to-let loans of this nature are harder to come by, so make sure you do your research and gain the advice and help of a professional broker to find you the best possible deal.

 

2. Exploit your spouse's personal allowance

Where you do make profits, if your spouse is not working, you may be able to assign part or all of the rental income to them, allowing them to exploit their personal tax allowance, due to rise to £12,500 by 2020, or 20% tax band. Again, we would advise speaking to a qualified tax advisor to advise if this is the best option for you. 

 

3. Become a company

The Government is cutting corporation tax to 19% this year and 18% in 2020, just as the buy-to-let changes start to kick in. One way for higher-rate taxpayers to cut their tax bills could be to invest via a company. This is not difficult, and can be arranged by your solicitor. But, proceed with caution, as there can be complications and associated costs.

The corporation tax rate isn't the only advantage. All costs can be offset against rental income, so in theory, profits have the potential to be further improved. We can put you in touch with a trusted solicitor who could look into this further for you.

 

4. Selling property and reducing loans

These changes will no doubt prompt landlords to reassess their holdings, with a view to selling up or paying off some of the loan. Where the landlord has a larger portfolio, it may make financial sense to sell of one property and reduce the loan amounts on the remainder of the portfolio. Using Centrick Property’s modern method of sale, we could sell your property for a 0% fee, so there’s no associated costs either.

 

5. Raise rents

Many commentators believe rents will have to rise, although how easy that will be given recent sharp upward moves remains to be seen.

Andy Butts, Sales and Lettings Director at Centrick Property, said: "We have already seen a noticeable increase, with rents climbing faster than property prices in some areas we cover. However, there could be further to go considering how buy-to-let landlords and lettings agents alike have been targeted by recent budgets from the government.”

 

There is no doubt that landlords have a turbulent time ahead with many hurriedly performing calculations, forecasts and projections. We would always suggest seeking professional and legal advice before undertaking any action and Centrick Property is here to help! We are always happy to offer free, impartial advice, regardless of the size of your portfolio or even if you are a client of ours or not! Just pop by one of our conveniently located property lounges for a drink and a chat or call one of our friendly teams.

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