What does the buy-to-let-tax review mean for landlords?

If you’re a buy-to-let landlord, you’re certainly in good company. Buy-to-let property investments have boomed in recent years, with as many as 1.75 million landlords living in the UK last year, according to HMRC.

But that’s all set to change very soon. Due to a tax review introduced as part of George Osbourne’s 2016 budget, which cuts the tax relief available to buy-to-let landlords, those with buy-to-let properties will need to rethink how they do business to avoid losing a significant amount.

So, what do you need to know? Well, as a private landlord, no matter how many properties you have in your portfolio, you will no longer be able to deduct buy-to-let costs from your rental income as you have previously. This includes the cost of your mortgage interest.

What this means is a notable tax increase for private landlords, which could deeply impact your cash flow. Effectively you’ll now be taxed on your turnover instead of your profit, and will also be hit with a new stamp duty surcharge.

The changes are being rolled out from April, though it won’t be until 2020 that they’re implemented completely. The end result by then will be zero tax relief for private landlords.

For many, this may sound like tough news to swallow. For some, it might seem like time to sell up and move on. But don’t panic – there are ways to combat the tax review without having to make drastic changes. Your options are:

  1. Set yourself up as a limited company. Limited companies are not affected by the new tax changes, so many landlords are now setting up as businesses to avoid losing their relief. According to specialists The Formations Company, setting up a business is quick and easy, and something many people choose to do in response to changes in the market. Their packages for setting up a company start from as little as £4.99.
  1. If you have a friend or loved on in a lower tax band, you could also transfer ownership of the property or properties to them – but be sure to find out first if they could just be lifted into a higher tax bracket once they take ownership of the properties. Capital gains tax will also become a factor here.
  1. Or, simply raise the cost of your rent. This is one way to subsidise the cost that losing tax relief will incur, though you might then be faced with tenants who aren’t willing to fork out the extra. To make your case, you may need to find ways of justifying the boost in rent – maybe by refurbishing.

Of course, the situation is different for different people. Landlords who don’t have a mortgage are undoubtedly in the best position, for example, as they won’t be affected by the inability to deduct the cost of mortgage interest from rental income. If you do have a mortgage, however, the tax changes will affect you. Your tax rate is calculated based on your income tax band, so if you’re in the middle, paying higher-rate tax on a property with a large mortgage, you’re likely to be hit with a significant increase in tax. With new profit calculations, landlords on basic-rate tax might also suffer if pushed up into the higher bracket.

So there are the facts. If you’re a buy-to-let landlord, now is the time to think about how you’re going to navigate these changes. There are still many reasons to stay in the buy-to-let game, so don’t be put off altogether – just make certain you’re prepared in the best way possible.

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This blog is a guest post from The Formations Company, a service which allows prospective business owners to incorporate their own limited company in a quick and easy process.