How landlords can avoid buy-to-let tax hikes
In 2017, tax relief on buy-to-let mortgage interest will start reducing and will continue dropping until 2020. If you’re a landlord who’s borrowing to invest in property, the changes could affect you. So what can you do about it?Holding on to the profit
For many property investors, the Chancellor’s decision to cut higher rate mortgage interest tax relief by a quarter every year between 2017 and 2020 could be the difference between turning a profit on every property and, well… not.
Telegraph Money quotes statistics from The National Landlords Association (NLA) which calculates that typical yields could drop from 4.9pc to 4.3pc for 40% taxpayers. On a typical £160,000 property with a £120,000 mortgage that could mean the difference between an annual profit of £612 and a loss of £588. Factor in the long heralded interest rate rise sometime in 2016 and that gap could widen further still.
So what’s to be done? Well, the changes don’t have to mean doom and gloom if you’re planning to let out your North Fylde home, or if you already have a portfolio of properties. But now really is the time to take action to mitigate the effect of George Osborne’s cuts. Here’s how:
Reduce the debt
Fylde landlords with a portfolio of mortgaged properties need to look at their total level of debt. What was once sustainable may no longer be so come 2017. So rather than taking a loss on a broad portfolio, why not sell a property or two and use the proceeds to reduce the debt across the rest of the portfolio, bringing the remaining properties back into profit?
Buy to let mortgages have never been as attractive as those for single homeowners, but fixed rate deals are available – and the longer you can fix your rate for, the less impact the Chancellor’s changes will have.
Just knocking 1% of your mortgage rate could be enough to turn a loss back into a profit.
Use your spouse’s personal allowance
If your spouse isn’t using (or is only using part of) their personal tax allowance, assign some of your rental income to them. As an alternative, you could take advantage of the new marriage allowance rules that allow £1,060 of a spouse’s personal allowance to be transferred to you if he/she earns less than £10,600 a year. Switching part of your rental income to your spouse, though, is likely to deliver greater benefit.
Become a company
It’s almost as though George Osborne’s trying to send North Fylde landlords a message: just as the tax relief starts to drop, Corporation Tax rates improve, and you can take advantage of these by investing as a company.
Things can get complicated, however, so only do this with the aid of a solicitor. Ask us for advice if you’re considering this option.
Raise your rents
The simplest option of the lot? Maybe, but only if the rest of the North Fylde lettings market does likewise. Raising rents could cover the shortfall between loss and profit. But, depending on how the rest of the market reacts, you could find yourself pricing yourself out of your own market.
Want advice on letting or remortgaging your North Fylde property? Just ask. You’ll find us here.