Prior to the new tax rules, which were introduced in the 2015 Budget, landlords could effectively claim tax relief on their mortgage interest repayments at their prevailing tax – 20% for basic-rate taxpayers, 40% for higher-rate taxpayers, and 45% for additional-rate taxpayers.
When the new regime is fully in place in 2020, landlords will only be able to claim tax relief for mortgage interest at the basic rate of 20%, potentially increasing tax liabilities for higher- and additional-rate taxpayers by thousands of pounds.
Moving to limited companies
Over the same period, however, corporation tax rates are reducing – from the current rate of 19% to 17% by April 2020. Therefore, it is to the advantage of some landlords to change their letting business to a limited company structure.
While any salary and dividends drawn from the company above the relevant individual allowance will be taxed at the prevailing rate – up to 45% for salary and 38.1% for dividends – any profits retained within the company structure are taxed at the lower corporation tax rate.
The appropriateness of a limited company buy-to-let to each individual is hard to ascertain, as there are many questions here, most of which are best answered by your accountant. However, we have seen a heightened interest in this kind of financing by landlords, which show a growing appetite since the changes were proposed back in 2015.
The impact on tenants
The tax changes have already seen rent increases for some tenants, but this has often depended on whether their individual landlord shifts to a limited company basis or continues trading as an individual.
For many professional landlords with large portfolios and relatively low mortgage exposure – including those who already operated their letting business as a company – there may be no need to increase rents. Those who continue to let as individuals – and especially those with larger mortgages relative to property values – could already be feeling the bite of the changing tax rules, and may have no choice other than to pass that cost onto their tenants in the form of rent hikes.
Changing the type of landlords, not the type of homeownership
The changing tax rules – in addition to other policy changes such as a new stamp duty surcharge on the purchase of second or subsequent properties – are likely to see some single-property landlords driven out of the game altogether.
A recent survey of over 800 landlords by specialist lender Kent Reliance indicated that in the past year landlords with fewer than five properties had not grown their portfolios, while those with ten or more homes had on average added one property.
While the full force of the tax changes won’t hit until April 2020, there’s already an indication it may not be achieving exactly what the government seems to have broadly set out as its aim for buy to let: to shift more properties from the hands of landlords and back into private ownership.
Rather, it may precipitate a shift that will see a reduction in the number of smaller, more amateur landlords, but present expanding opportunities for larger, professional landlords and property investors able to leverage the value in their portfolios while keeping mortgage liabilities to a relative minimum.
Carl Shave is the co-founder of Just Mortgage Brokers.
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