Landlords need to prepare for change in the way profit is calculated

With the new tax year approaching, now is a good time to get your tax affairs up to date, and to start planning for further changes to the tax treatment of mortgage interest announced in the 2015 Budget.

The phasing out of mortgage interest relief for buy-to-let landlords will restrict the amount that landlords can offset against finance costs on residential properties to the basic rate of income tax.

Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their property profits. They will instead receive a basic rate reduction from their income tax liability for their finance costs.

In the existing financial year, landlords are able to obtain 75% relief in terms of finance costs, with the remaining 25% being available as a basic rate tax reduction.

But from 6 April, which marks the start of the new 2018-19 fiscal year, landlords will only be permitted to 50% finance costs deduction and 50% given as a basic rate tax reduction.

In 2019-20, 25% finance costs deduction will be permitted and 75% given as a basic rate tax reduction, while from 2020-21 all financing costs incurred by a landlord will be given as a basic rate tax reduction.

The phasing out of mortgage interest relief has already had a major impact on the way buy-to-let landlords operate, with 19% of landlords having already moved properties into a limited company or transferred ownership to a spouse, according to new research by Kent Reliance.

But somewhat concerning, the study by the specialist lender, part of OneSavings Bank, also shows that 15% of landlords do not fully understand the implications of taking this action, and could be in for a rude awakening when they file taxes for the year 2017/18.

Adrian Moloney, sales and marketing director at OneSavings Bank, said: “Landlords have had nearly three years to understand and prepare for the changes to the tax treatment of mortgage interest. Most have risen to the challenge, but a few might have quite the shock when they come to file this year’s tax return.”

Moloney is calling on brokers to use the looming tax deadline as an opportunity to educate landlords about the new tax regime.

He added: “As the tax year draws to a close, brokers can use this opportunity to engage with their clients, make sure they’re aware of the potential impact on their finances.

“Many landlords have sought to move to a limited company structure, or transferred ownership to a spouse but it’s not a one-size-fits-all solution so it’s vital that landlords affected seek professional tax advice.”

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