In April this year, long-awaited changes to buy-to-let property were finally implemented. If you’re a buy-to-let landlord, or you’re looking to become one, then you’ll need a thorough understanding of these changes. Fortunately, that’s exactly what this article will provide. Let’s begin!
What is Buy-to-Let?
Put simply, buy-to-let is a practice whereby a landlord buys a property for the expressed purpose of letting it out to a tenant. There are rules around mortgages granted for this purpose which differ slightly from those governing regular mortgages.
To begin with, the fees associated with these mortgages tend to be higher, as do the interest rates. The minimum deposit for the mortgage also tends to be higher, with anywhere from twenty to forty percent being demanded by the lender up-front.
So, with everything being slightly more expensive, where do the advantages of BTL mortgages come in? In most cases, BTL mortgages are interest only, which means you’ll only pay interest on the loan each month, and then repay the capital in full at the end of the mortgage term. Of course, if you’ve got mortgages outstanding on multiple properties, this extra cash each month can be put to work. In some cases, BTL mortgage lending isn’t regulated by the Financial Conduct Authority – excepting certain cases, where you’re lending to a close family member.
What is the Buy-to-Let Tax?
Like the much-maligned Bedroom Tax, the hated “Dementia” Tax, and the doomed Pasty Tax, Buy-to-let tax isn’t technically a tax at all – though its effects on the wallet might have much the same effect.
If you’re going to sell your buy-to-let property, then you’ll need to pay what’s called Capital Gains Tax on your sale. This is a tax applied to the profits you make by selling an asset that’s increased in value since you bought it. It’s this tax that allows the exchequer to squeeze professionals who make their living buying and selling things – antiques dealers and stockbrokers being good examples.
In 2018, you’ll be able to make a profit of up to £11,300 before you must contribute. This allowance is known as your Annual Exempt Amount. You might be able to effectively increase this figure by deducting losses you make as a result of the sale.
The amount of capital gains tax you pay will vary according to the tax band you’re in. If you’re a ‘higher’ or ‘additional’ rate taxpayer with a taxable income in excess of £45,000, then this figure will be 28% from properties sold. If you’re a basic-rate taxpayer, then you’ll pay a slightly different rate, arrived at by calculating your taxable income and adding it to your gains minus your tax-free allowance. If the resulting figure falls within the basic income tax band, then you’ll be paying 18% on your property sales rather than 28%.
Suffice to say, an effective accounting team can be worth their weight in gold to a buy-to-let landlord, as they can help you to avoid the incoming changes.
What are the Changes to the Buy-to-Let Tax Relief?
Previously, landlords could offset their mortgage interest payments against their profits from rental income when calculating the amount of Capital Gains tax owed. If you’ve earned £20,000 in rental income for a given year, but paid out £15,000 in mortgage interest payments, then your gains are £5,000. Your profit would then be taxed according to your income-tax band, as we’ve already looked at.
In March 2016, a few months before losing a referendum, being unceremoniously sacked, and then going on to a surprising career in newspaper-editing, the then-chancellor-of-the-exchequer George Osbourne announced that this tax relief would be cut back from 100% to 20%. This cut would be phased-in gradually between 2017 and 2020. This could result in thousands of pounds being added onto the annual tax bill – and so it’s small wonder that the changes have been so poorly received among buy-to-let landlords!
How Can I Deal with the Changes?
Of course, the moment the clever people at the exchequer announce changes to the tax system, more clever people are hard at work trying to work out how to get around those changes.
One of the most obvious ways to do this is to simply get rid of your properties before the changes have time to bite. If you’re a top-rate taxpayer, then you’ll have an extra incentive to do so, as you’ll be footing the largest bill. If you’ve got a large property portfolio, then buying a few properties abroad via a company will help you sidestep what might have been a crippling blow.
If you’re the proud owner of a smaller property portfolio, then you’re not at risk of financial ruin. Your focus should therefore lie on cutting your costs and raising revenue. A brutal means of doing this is to simply jack up the rent – which is why the changes might adversely affect renters as well as the people they’re renting from.
You might also try to negotiate a lower interest rate, or reduce the amount of the mortgage – there’s less reason to tolerate a larger outlay on interest, after all, if you’re getting less relief on said outlay.
A good way of paying off your mortgage quickly is to re-mortgage your main residence. Since homeowners tend to get lower rates on residential mortgages than buy-to-let ones, this will likely provide a better deal. Another option is to move your property inside a company – if you can justify the costs associated with doing so.
The nuclear option, of course, is to simply sell all your buy-to-let properties and get out entirely. Suffice to say, this isn’t an option that you’ll be considering unless you already harbour doubts about your future as a landlord – but if you’re already wavering; a few thousand pounds extra on your tax bill each year might just be enough to give you the required push.
For most landlords, however, there exist ways to wriggle through the changes largely unscathed – as there will be when future chancellors make further changes!