Wanting to cut the number of landlords starting out in the property market, the government has cut back on buy-to-let tax relief in recent years, making it harder to earn an attractive income. Back in 2015, the Chancellor announced a 3% increase in stamp duty on additional properties and scaled back the tax relief on buy-to-let mortgages. The changes were phased in from 2017 and the new rules will be fully in place from April 2020.


What changes from April 2020?

Under the previous rules, expenditure on mortgage and loan interest and similar costs (including arrangement fees) were allowed as an expense in calculating an overall rental profit, with tax payable on the net profit, or with the net loss being carried forward against future rental profits.


From April 2020, if you pay income tax from residential letting income, interest is no longer deducted from profit before calculating the tax. Instead, tax is calculated without reference to interest costs incurred, and then 20% of the interest costs are deducted from the resulting liability. Therefore, tax relief is effectively limited to basic rate relief, irrespective of an individual’s marginal tax rate.


What can you do to mitigate the impact?

Seek professional advice as soon as you can and investigate these options:


  1. De-leverage your property portfolio: The changes will have a larger impact on portfolios with a higher proportion of interest to rental income. You would benefit from reducing borrowings to line up your taxable income with the economic business profit including interest costs. This is achievable using existing savings or from a lump sum from a pension fund or inheritance.


You could also sell a property to release equity to pay down mortgages but seek advice on the potential Capital Gains Tax payable on property disposals (consider the number of disposals per tax year to maximise CGT annual exemption). This might be a good time to transfer some ownership to a spouse.


  1. Invest via a limited company: You can avoid the rules completely if you hold your portfolio via a limited company. But beware of the pitfalls, eg. The company pays corporation tax on the gain of future property sales and you will need to either pay income tax or CGT to extract the proceeds personally unless you reinvest in a new property or alternative investment.


It may be possible to avoid CGT and/or stamp duty costs in moving properties which are currently in personal ownership within large portfolios which are run as a business. Any undrawn profits are charged only to corporation tax and not higher rates of income tax.


  1. Switch borrowing to commercial property or furnished holiday lets: As the rules apply only to residential lettings, you could secure borrowings against commercial property or qualifying furnished holiday lets that you own or may consider investing in, reducing or removing the significant impact.


There are advantages and disadvantages to all these options. We strongly suggest that you shouldn’t make any decisions until you’ve discussed your choices with a professional such as the team at CRM. If you’d like further clarification on the tax relief changes, get in touch with CRM on 01865 379272 as soon as possible.

Sage Accountant Partner Logoiris kashflowFreeagent