The Government is making changes to the way landlords pay tax, which for some will mean they’re looking to leave the landlording behind. But if you play your cards right, you can run your rental property business the right way and still be successful.
So what’s going on in the world of landlord tax accounting? This might not be the most exciting question you ask yourself today, but if you’re a landlord, it could be the most important question of the day! In this blog we’ll cover the changes and what plans you can put in place to ensure you’re as protected as you can be from the new tax rules for landlords.
Mortgage Interest Tax Relief
Originally announced in the 2015 Budget, the Government is overhauling Section 24 of the Finance Act, which will affect the amount of tax relief buy-to-let landlords can claim on their properties.
The changes mean that higher rate tax paying landlords will no longer be able to offset their mortgage interest costs against their tax bill, and the changes are being introduced in stages over the next couple of years. The old system was popular, landlords would be able to deduct all mortgage interest before calculating their tax bill, meaning that they were taxed only on the profits.
Instead of the current system that landlords know, a new one will be phased in over the next few years. The new system sees the mortgage interest relief tax replaced by the basic 20% tax rate for higher rate taxpayers.
So in January 2019 when landlords come to sit down and complete their Self Assessment Tax Returns, they will notice the difference. As of April 2017 the changes were set in motion, and higher rate tax paying landlords will only be able to claim relief on 75% of their mortgage interest, along with a new phased tax of 25% of the basic rate (20%)
|Tax Year||% Deductible Mortgage Interest||% Basic Rate Tax (20%) on Mortgage Interest|
(Filed Jan 2019)
(Filed Jan 2020)
(Filed Jan 2021)
It’s not a popular move, it will mean that many landlords will pay more tax overall, seeing their tax credit cut by around 50%. And there is concern for many that their landlord income counting towards their overall income will push them into a higher tax bracket too. But there are many ways to manage your property portfolio, and setting up a Limited Company is one of them!
Buy-To-Let Is Now Business-To-Let
The most popular solution for landlords is by far to set up a Limited Company. Don’t panic, most landlords do not know much about setting up a Limited Company, it’s a big step, but that’s why we’re here to help.
By setting up a Limited Company you will have a little more admin to do if you decide to go it alone without an accountant, but you’ll have less tax to pay. If your rental property/properties are owned by a Limited Company, your mortgage interest payments can still be offset against your profits because the payments are treated as a business expense. Plus corporation tax is currently at 19% and will be reduced to 18% by 2020, which is lower than income tax and therefore presents a more attractive opportunity.
In fact, most new buy-to-let landlords are choosing to set up via a Limited Company. But it’s only sensible to point out at this stage, operating a Limited Company may not suit all landlords, so it’s best to have a chat with an expert before making any decision.
If you’ve not bought a property in the past two years you’d be forgiven for not realising that Stamp Duty has changed. Of course Stamp Duty hit headlines in the Autumn Budget 2017, when it was axed for first time buyers for properties under £300,000, but in 2016 Stamp Duty was changed for buy-to-let and second home purchases too.
An additional 3% stamp duty is to be paid for any second or buy-to-let property over £40,000, under this threshold is still exempt from Stamp Duty.
So landlords need to take this into account if they’re looking to increase their property portfolio.
Capital Gains Tax
Finally, a little good news for landlords who are considering setting up as a Limited Company.
Landlords who sell a buy-to-let property will have to pay CGT on the profits of 28%, this tax cannot be claimed back, even if you are only selling a property in order to buy a different buy-to-let investment property. This can be a big hit for landlords operating privately, as sometimes the sale of a property is a necessity.
However, if a landlord operates via a Limited Company the CGT applicable to businesses has been drastically reduced by the Government as a way of encouraging landlords to operate in this manner. The rate of CGT a Limited Company will pay when selling a property is only 19%.
It’s been common-place for a while now what landlords who rent one property to multiple people people will need a licence to do so. However more recently local councils also require a landlord licence for any type of rental property, these local councils include areas in and around Manchester and London. Here’s a handy article from Which to help you decide if you’ll need a landlord licence.
Planning For 2020
Most landlords will need to seek advice to fully understand how their tax and income will change as a result of these developments. And it’s likely that most will change the way they operate in order to benefit the most from their buy-to-let properties.
The key is to make a plan now, because your 2017-2018 Self Assessment bill will already have been affected by these developments.
Every individual’s circumstances will be different and there will be an ideal path for each landlord to take, so why not seek the advice of a professional now and take control of your future?
And unfortunately for many renters, the rental property market is likely to become more expensive and more in-demand as a result of these changes. Many landlords are looking to sell to avoid the increased costs of owning a buy-to-let property, others are considering raising their monthly rates to cover the difference. Either way it leads to an already tight rental market becoming more sparse and more expensive.
And where there’s challenge, there’s also opportunity for the landlords who maintain their presence and/or increase their portfolio. This is another area that Warr & Co can help advise their clients in.
Consider An Accountant
The world of Landlord tax is becoming more and more complex. With a multitude of changes planned and changes proposed for the future to both landlord tax and Limited Companies, it’s wise to consider hiring an accountant.
Luckily Warr & Co have a team of accountants ready to help, and we even have a cost-effective service package specifically developed for landlords operating via a Limited Company.
The biggest benefit of becoming a Warr & Co client and signing up to a Landlord Service Package is that we handle just about everything for you. We keep you informed, provide you with an Accounting Cloud login and even offer built-in support to protect your from an HMRC investigation.
So if you think that a Limited Company could be the answer you’re looking for, why not give our team a call and arrange a free no-obligation consultation with one of our landlord accounting experts.