Friday, 17 July 2015

What Will The Tax Allowance Changes Mean To Sunderland Landlords - And What Can You Do About It?

The Chancellor George Osborne sprung a rather unexpected and nasty surprise on Landlords in the recent budget, by restricting interest rate relief on Buy to Let mortgages - now the dust has had time to settle I thought it worth taking a look at what it may mean for Sunderland Landlords

The Chancellor has cut the tax relief that private landlords receive on their mortgage interest payments, cutting it from 40% or 45% for higher rate taxpayers to 20% by April 2020

The new restrictions start in the 2017-18 tax year on a sliding scale, and become fully effective in 2020-21

The changes will only affect higher rate tax payers, so Landlords who only pay the basic 20% rate of tax will not be adversely affected

This phasing in will mean that 25% of this extra tax will be payable on profits made in the April 2017- April 2018 tax year, 50% in April 2018-April 2019, 75% in April 2019-April 2020 and 100% in April 2020-April 2021 meaning that the full effect of this wont be felt until your January 2022 personal tax bill is due

On a property worth £100,000, a landlord in a higher tax bracket with an 85% loan-to-value mortgage and a mortgage interest rate of 5% would end up losing £100 a year. When the rate reaches 5.5%, the burden on the landlord's finances will jump again, triggering a loss of £440, and then to £780 when the rate reaches 6%, according to financial experts

Industry professionals say George Osborne's Budget move is likely to hit people who have sunk their money into property because they were getting no interest on their savings in the bank, or following the financial crisis, no longer trust the pension model, and are relying on rental income

Ultimately this change in tax relief for Landlords will not only affect landlords, it will also be detrimental to Tenants because ultimately, if Landlords' margins are squeezed, they will be forced to increase their rents to make their investments work, or sell up

It is still early days and we need to see how HMRC will implement some of these changes but here are some initial thoughts on how we could tackle this change

This change only seems to affect individuals and partnerships/LLPs. Ltd companies seem to be excluded. Landlords could potentially look to purchase their future properties into Ltd companies (if this works Buy To Let lenders will become more open to this-otherwise commercial lenders will already facilitate this)

For those who already own properties personally or in a partnership/LLP they may want to transfer them to a Ltd company (but they will be subject to capital gains tax and stamp duty)

An easier way to do this if you want to keep your current mortgage would be by using a deed of trust, which would transfer the beneficial ownership to a Ltd company

A good solicitor can draw one of these up for you but please seek professional financial advice before doing so as it will affect the way you get your money out in a tax efficient manner (you will either need to take the money out on the form of dividend, salary or bonus, none of which are tax efficient) and furthermore tax on gains will always be payable at some point (capital gains tax stops being payable when you die but Ltd companies are immortal!) 

New analysis from accountants PwC featured in an excellent Daily Telegraph article has shown that if a private landlord transfers one or more properties into a company structure, known as incorporating a business, the total tax rate is greatly reduced.

"This is because a company is paying tax on the actual profit and therefore the rate does not fluctuate wildly. If the profit reduces, so does the tax," said Paul Emery, a tax partner at PwC.

"If the rental property is run privately, there is a scenario where because you no longer get full tax relief for your expenses, you can pay tax even if there is no profit," he added. "That means potentially enormous effective rates of tax."

By 2020, when interest rates are likely to be higher, the levy on a property worth £100,000 to a private landlord in a higher tax bracket - with an 85pc loan-to-value mortgage and a mortgage interest rate of 5pc - would be 106pc

As a result they would expect to suffer an annual loss of £100

If the same property were run as a business, the landlord would pay a tax rate of just 49.2pc and bank £888.

If mortgage rates go up further, the contrast becomes more stark

If rates hit 6pc, a property owner operating under a business umbrella would again pay 49.2pc, but the private landlord would pay 186.7pc tax, and make an annual loss of £780, according to the PwC model

"Other taxes such as stamp duty and capital gains tax could affect profits from a rental business, especially for a landlord with only a handful of properties," warned Mr Emery

If the owner is a sole trader, he would pay stamp duty again on the "incorporation of the business" based on cost of the property

But if the owner is in business with a partner, they could enjoy some stamp duty relief

Alternatively, if a sole trader or business partners own more than six properties, it is classified as a commercial property business and they will only pay a flat 4pc stamp duty on the sale

"The big tax difference is capital gains tax when the company finally comes to sell and dividend the profit to the owner at 49pc compared to 28pc for a private landlord - but at least you would know what your effective rate of tax is, and if you are reliant on the income rather than the appreciation of price, it may be a hit worth taking," said Mr Emery

"Although incorporating your business helps you guarantee your monthly tax bill, it is not a magic solution. Tax is only one consideration when forming a company. For example, audited accounts might need to be filed," he added

Savvy landlords will look to purchase more properties that need refurbs

Whilst another change to the is that Landlords can no longer claim 10% tax relief for wear and tear (and instead must claim back the actual amount spent) as long as the property is in a lettable condition when you buy it (but still needs redecoration) and comes into the lettings market before the refurb is done most repairs/replacements such as kitchens, bathrooms, paint etc can be offset against all property income from your whole portfolio

This means that a £7,000 refurbishment could potentially come off all of your other rental income profits

So the solution for those most heavily affected by this tax change could be to buy a few properties that need a refurb every year

Given the changes will only take affect between 2017 and 2020 there's plenty of time to prepare and undoubtedly there will be further advice and guidance over the coming months with strategies being developed to mitigate against the losses 

As always my advice would be to consult an expert on such matters - the above are just a few pointers I've picked up from reading exhaustively about this since the change was announced

If you'd like to discuss what impact this change may have on your rental income speak to an accountant or tax adviser (I can recommend one if you wish) or to discuss any aspect of the Sunderland property market please call me on 0191 567 8577 or email


  1. I've worked with IP Help as a realtor and his ethics, professionalism and integrity are at the highest level. I've always had good feeling in dealing with IP Help both personally and professionally. I know he is not only professional in his dealings, but also cares about the people he serves in his business…

  2. If you are not sure if an adviser is whole of market then ask them. Kirkland Mortgage

  3. You will not be the owner of the vehicle until you have repaid the loan in full, and the car will be repossessed if you default on repayments. personal loan