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Over the past year, the buy to let market has experienced some substantial changes, most recently the new taxation laws which have left landlords rushing to protect themselves from higher tax bills. This came in the form of landlords becoming unable to offset all their mortgage interest against their profits and means that landlords will be taxed more and, in some cases, will be taxed on non-existent profits.
In the next three years, this will transcend to none of the interest being tax deductible. The reduction is being phased in as follows: between now and 2020 reduction of relief will be replaced by 20% tax credit. Landlords can now only offset 75% of their mortgage interest against their profits which falls to 50% next year, 25% in 2019 and 0% in 2020.
These tax changes will mean that investors will pay higher tax and, in some cases, even if they have not seen their income increase. While the changes mainly affect those Landlords which are already in the higher income-tax bracket it has also seen some basic-rate taxpayers being pushed into the higher rate once their rental income has been considered. Many will also lose means-tested benefits.
A key factor to remember is, the change only applies to individuals who privately own buy to let and not to those who own property through companies.
So, what can be done to help diminish the effects of these changes? One element is that Landlords need to become more focused on costs. According to John Charcol, the mortgage broker, Landlords need to plan in advance, starting with going to see their tax advisers to see how the changes will directly affect them. Many people are now looking to sell their London properties which would see huge hikes in tax and buy two or three properties elsewhere via a limited company. This may, however, mean that they could face huge capital gains tax bills.
If you are in the top-rate tax bracket then this could be an option worth exploring. For those who have smaller portfolios and won’t be as badly affected by the changes, it is important to focus on costs. This can include reviewing your mortgage to see if you can get a lower rate or reducing the mortgage amount. Increasing rent is also another option.
Capital gains tax should also be a significant consideration for all investment property owners. The tax-free allowance on any gain is currently £11,100 but this is relatively low in relation to a gain of, say, £100,000 on the sale of such a property.
The tax rates for gains are 28pc for higher-rate taxpayers and 18pc for those who pay the basic rate. But the latter will pay 28pc on gains that exceed the basic-rate band. A compelling argument for investing in pensions and Isa’s is that growth is exempt from capital gains tax.