From April 2017 the Chancellor’s reduction to mortgage interest tax relief comes into force. This will be phased in up to 2020 but for heavily geared landlords the impact will be felt far sooner. The risk for highly geared landlords is that they could be forced to pay tax on zero profits or even loss making properties.
It is expected that many landlords will start to take action, the National Landlords Association (NLA) expect to see 500,000 properties sold before April 2017 with a further 100,000 sold per annum afterwards.
There remains a question over who buys these properties with the tightening or residential mortgage criteria and an increasing burden of regulation on the sector. It may be that landlords are forced to pass on their increased costs to tenants, time will tell.
What the tax changes mean
At present interest can be set off against profits meaning that tax is paid only on profits. This is all changing.
From April 2017 the percentage of interest which can be set off against income starts to reduce. At the same time a percentage of the interest is allowed as a 20% tax reduction, for higher rate tax paying landlords the impact becomes greater.
The changes look like this;
Move property to limited company
There is an increase in properties being purchased by limited companies. This separates the tax out of your personal allowance and into the company. Carpenter Box accountants are reporting that HMRC have given clearance for no stamp duty (SDLT) to be paid where ownership is moved from the personal name into a limited company providing the ownership of the company matches that of the current property ownership.
For most landlords this should be perfectly possible and opens up a path to some mitigation of the new costs.
As a limited company mortgage interest remains a taxable expense deducted before corporation tax. With the expected reductions in corporation tax in future years then you can start to see why purchases in company names is gaining in popularity.
The key thing is that all these changes are at an early stage. It is not uncommon to see a challenge to interpretation in the courts followed by a counter challenge. All this means uncertainty for landlords and that for many property investors it is time to look at other options.
Other options for landlords
Spouse transfer – If one person is a higher rate tax payer then there may be scope to move the property to the spouse if they are a lower rate tax payer. There is no CGT payable on spouse transfers so this remains an option for some landlords.
Limited company – Moving property to a limited company is detailed above. It is important to establish your long term aims before going down this route, take advice before you do as it will impact on your CGT liability and personal tax if you sell and draw from the business.
Refinance – For many landlords it could be time to refinance. Cash flow now becomes more important so reviewing how your borrowing is structured and establishing a plan could be a good choice. There are options for longer interest only periods on investment property mortgages that could reduce outgoings and release cash.
With some landlords looking to sell as the NLA suggest then there will be opportunities for other property investors to acquire and grow their portfolios. How this plays out in terms of price and value remains to be seen however there is an appetite among lenders to provide mortgage finance for investment purchases.
We are starting to see some tightening of mortgage criteria for buy to lets, however for commercial and semi-commercial property the appetite remains strong from lenders.
If you want to look at your mortgage finance options then get in touch and we can talk through your options.
By Dave Farmer