George Osbornes most recent budget was bleak news for many landlords. New rules, to be phased in between 2017 and 2020, stand to cut gross returns on buy-to-let properties by almost 11% and could leave many investors with loss-making investments. Tax relief on investment mortgages has been dramatically cut for higher rate taxpayers, limited to 20% of interest. According to London & Country Mortgages, this would turn a £160,000 property with a £120,000 loan from a £612-a-year profit maker to a loss maker of £588 annually.
However, there are several quite legal steps that landlords can take to reduce their tax liability under the new rules, reducing or evading the impact of the changes. These include:
Sharing Couples Personal Allowances
It may be possible for couples to share their personal allowances to some extent in order to reduce tax liability. If you are making money on a buy-to-let investment but your spouse is currently not working or on lower earnings, then it may be possible to have some or even all rental yields under their name. This will give you the benefit of two personal allowances rather than one for your investments, and as the new rules primarily affect higher-rate tax payers this can shelter your income in lower tax brackets – especially if taking that income out of your own tax equation means you are no longer in the higher-rate bracket either.
The tax hikes are made all the worse by the unfortunate fact that they coincide with expected mortgage rate rises. If you want to reduce the overall impact, this might be the time to hop over to another, better deal.
Supposing you are currently paying around 5% on your current deal and you take the opportunity to switch to a new five-year fixed rate in the region of 3.8%. As well as sheltering you from rate rises for a few more years, the annual savings over the fixed rate period of the new mortgage could approach £1,500. This could be enough to keep an investment profitable when the tax hikes would otherwise turn it into a loss maker.
Set up as a Limited Company
At the same time as landlords get a tax hike, corporation tax is being cut. It will fall to 19% in 2017 and 18% in 2020, and for some higher rate tax payers this could mean that setting up a limited company through which to invest might be noticeably more tax-efficient. As well as offering a lower tax rate, it means that all costs will be eligible for offsetting against profits. However, speak to an accountant or solicitor to make sure you understand complications, such as the fact that you can only take income in the form of dividends which introduces a whole new set of rules after a certain amount.
Reassess Your Holdings
The simple truth might be that the best way to reduce the impact of the changes is to reassess your portfolio and trim out investments that will start making a loss in a few years time. Do this sooner rather than later, and with help from an accountant if necessary. It may well be worth using proceeds from selling some properties to reduce borrowing on others.
This point is self-explanatory, and may be the only option for many landlords so you are unlikely to be the only one in the market putting prices up. If all else fails, then rising costs may have to translate into rising rents to keep your investments making money.
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