New tax year changes for landlords

There are just a few weeks to go before the new 2019-20 tax year begins on 6th April, when landlords will see further reductions in the amount of tax relief they can claim.

In the current tax year, landlords can deduct 50% of their mortgage interest payments, and claim basic rate relief on the other 50%. Once the new tax year begins, it will only be possible for landlords to deduct 25% of mortgage interest payments, and claim basic rate relief on the remaining 75%.

These changes were announced in the 2015 Budget. Landlords used to be able to claim tax relief on their mortgage interest payments at their marginal tax rate. This meant basic, higher, and additional rate taxpayers could benefit from relief at 20%, 40% or 45% respectively.

When the 2020-21 tax year begins next April, landlords will only be able to claim tax relief at the basic rate, regardless of whether they are a higher or additional rate taxpayer.

However, it will still be possible for landlords to deduct other allowable costs from gross rental income when working out their taxable income.

You can find out more about tax and buy-to-let property here.

Review your mortgage

Landlords who are concerned about any additional costs they may face due to changes to tax relief should review their mortgages to ensure they are on the best possible deal.

Remortgaging to a lower interest rate can help keep monthly outgoings to a minimum and reduce the impact of the tax relief changes.

The good news is that the number of buy-to-let mortgages available is at its highest in over a decade, and competition among lenders remains strong.

Seek advice if considering a limited company

Recent years have seen growing numbers of landlords set up limited companies in which to hold their properties to try to reduce tax bills.

According to research conducted by Kent Reliance in 2018, one in five landlords said they had set up a limited company in order to offset the changes to the tax treatment of buy to let.

However, there are both advantages and disadvantages to consider for landlords wanting to take the limited company route.

A limited company can set costs including mortgage interest against income for corporation tax purposes, but there could also be hefty costs involved.

If a landlord has existing properties, for example, and wants to transfer ownership to the new company, it is effectively the same as buying and selling property. This process could lead to a significant tax bill once stamp duty costs and any potential capital gains tax (CGT) liabilities are factored in.

It’s therefore essential to seek professional tax advice first to determine whether a limited company is a suitable option based on your individual circumstances.