What the Phasing Out of Property Tax Relief Means for Landlords

By: Emma Gettings

It’s another New Year and the UK’s Buy-to-Let (BTL) landlords must now prepare for another change to the way their property-related income is calculated and taxed. Unfortunately, for some 440,000 private BTL landlords, the outcome isn’t going to be one they’re happy with.

April 2017 marks the beginning of the end for property income tax relief. That’s right, as of a couple of month’s time, landlords will no longer be able to exclude mortgage interest payments – and other related costs – when calculating their rental income.

“Over a period of four years, the Government will completely remove property tax relief and all landlords’ total income will be taxable at the basic rate of income tax,” said Knightsbridge estate agent, Plaza Estates. “This will affect quite a lot of private sector landlords and could provide a further blow to the number of properties available for rent.”

What the Numbers Show

Here are a few numbers to get a better idea of what the change means and how it will work.

At the moment, a BTL landlord in receipt of a yearly rental income of £15,000 can exclude any mortgage interest payments from their total income, for tax purposes. That means, if the mortgage payments for that landlord on that property – on an interest-only mortgage – are £10,000, then that amount can be deducted from their earnings and they only pay tax on the other £5,000.

This will change on April 1st 2017 when 25% of that £10,000 mortgage interest repayment will be taxed. That then rises to 50% in April 2018, 75% in April 2019 and finally, to 100% of the total rental income, including costs, from April 2020. And, because a larger amount of rental income will be added to the landlord’s total earnings, where as previously it was a smaller proportion, this change will push more landlords into the higher tax rate band.

“Unfortunately, this is tax change is more likely to affect those who are working and have a small-ish portfolio of BTL properties as a pension investment,” said Assetgrove, rent guaranteed specialists.

That’s because the rental income will be added on to the earnings from their job, with their new tax rate calculated on the combined earnings of the two incomes. Research suggests close to half a million landlords will be pushed into the higher tax bracket once the tax change is fully phased in.

There are Ways to Circumvent the Tax Relief Change

If you’re still keen on including a BTL property in your investment portfolio, but are less keen on the tax implications this change will usher in, there are a few things you can do.

  • Become a limited company.
  • Raise rents.
  • Use your spouse’s tax allowance.
  • Re-balance your BTL portfolio.

The most recent Kent Reliance Buy-to-Let Britain report showed that some landlords began making changes to ensure they were in a better position, as early as the first half of 2016. But, there are still many landlords who aren’t certain how the change to property tax relief will affect them, or if it will affect them at all.

High street mortgage lender Nationwide have created a helpful illustration of the impact of the property tax relief change. Their figures show that a landlord with a £150,000 buy-to-let mortgage on a rental property worth £200,000 receiving a monthly rent of £800, would currently be making a net profit of something like £2,160 a year. Once the new system is fully phased in, that net profit is cut by more than half to around £960.

And remember, that’s before you calculate the change to your entire income from being potentially pushed into the higher income tax bracket.

“The withdrawal of property income tax relief is going to hit a lot of landlords, some of them pretty hard, said Best Gapp. “While the Government is doing the right thing by phasing it out gradually, there is still the potential for a double impact on the private rental sector – higher rents and fewer available homes. Let’s hope the Government’s building plan can deliver to help provide enough homes in the future.”

Written by Gurleen, at Property Divison