Mortgage Tax Relief Changes for Landlords

Published: 19th April 2018

Mortgage Tax Relief Changes for Landlords

If you are a landlord, you should already be aware of the changes that the government has made to the rules regarding mortgage tax relief. These changes are now being phased in and property investors are getting ready to feel the pinch.

With the first round of tax bills affected by new Government regulations about to be submitted, investors are waiting anxiously to see what profits can still be made from property and how best to achieve this. Fears have been rife that the property investor is being pushed out of the market as the Government tries to encourage more first time buyers, but landlords still play a vital role in the property landscape which means there is still room for profitable investments.

Mortgage Interest Tax Relief

In the past, investors in property have been able to benefit from a scheme that allowed them to deduct all of the interest paid on their mortgage before calculating their tax bill. In some cases, this saved huge amounts of money as landlords were then taxed on their profits rather than their full turnover.

As many landlords opted for interest-only mortgages, they were able to make significant savings through the scheme, but all of this is about to come to an end. When filing tax returns for the end of this tax year, landlords will only be able to claim tax relief on 75% of their mortgage and they will receive a 20% tax credit on the remainder of their mortgage interest. Over the next two years the percentage of the mortgage interest that landlords can claim relief for will diminish further until it has been wiped out entirely, with just the 20% credit remaining.

Tax Changes

Whilst the changes are not popular amongst most landlords, they should not come as a shock. The plans to remove this relief were outlined by George Osbourne in the 2015 Budget, but are only starting to take effect now. This current tax bill, payable by January 2019, is the first one that has been affected and some landlords fear that they could lose out on thousands of pounds worth of profit.

By the time the April 2020-2021 tax year arrives, mortgage interest tax relief will have been fully replaced by the 20% tax credit and this is even less for higher rate taxpayers. As many landlords will now be declaring a higher income, they could find themselves in the higher tax bracket.

Limited Company Property Purchases

One loophole that many landlords have investigated is making their property investments through their own limited company. The laws are different when a property is purchased through a limited company, as it has its own legal identity and assets.

Mortgage interest is still considered a tax deductable cost for limited companies, and many landlords find paying 19% Corporation Tax on rental yields and receiving mortgage interest relief better than paying the 40% tax on the earnings of a higher rate taxpayer. However, this many only be a short-term fix as you will at some point want to release dividends from the company which you are likely to be taxed on.

Setting up a limited company with another director and shareholder, such as a partner, means that the profits are spilt and each person will pay less tax on the dividends that they take

Property Profits

There have been many changes made by the Government that have affected how property investment works, leading many to question whether there is still a profit to be made.

It is certainly fair to say that the sector has cooled since the announcements were made, but many investors have adopted a careful, methodical approach that has seen a return of consistent, if not increased profits.

With probable interest rate increases from the Bank of England and the closure of funding for lending schemes, it is likely that mortgages could become more expensive. It means landlords will have to do a lot of shopping around for mortgages and make sound investments. Those who already have four mortgaged properties will find themselves subject to tougher lending restrictions. They will be required to provide details of each property that they own when applying for finance on the next property.

Landlords also need to be aware of the energy efficiency rating of their properties, as those with an EPC rating of less than E will be subject to fines as well as the cost of getting their properties up to scratch. At the moment this only applies to new tenancies and renewals, but by 2020 it will cover all existing tenancies.

Some local councils are now taking a closer interest in the property investors in their area and have decided to bring in licensing schemes. Depending on where you live, some local councils have introduced selective licencing, meaning you may need a licence to be a landlord, so it is important to check this with your local authority.

Increases in Stamp Duty are also likely to eat into any profits if your goal is to flip the property. Investing in the right way at the right time can still provide strong rental yields and capital growth, it may just mean investing in a different way.

Investors are now looking at different parts of the country, different types of properties and different ways of making the investment to get the most out of their profits. Good research, full planning and a sensible exit strategy can all lead to a healthy bank balance. Planning is key to success.

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