Buy-to-let landlords will see their after-tax profits reduced
Individual buy-to-let landlords face a severe dent in after tax profits, say London Chartered Accountants Blick Rothenberg LLP.
Following the announcement by George Osborne that mortgage interest relief will be restricted from April 2017, Nimesh Shah, partner at Blick Rothenberg, said: “This is the latest package of measures impacting residential property, presumably to make buy-to-let properties less attractive for investors, and an attempt to ‘cool’ the housing market.”
Nimesh added: “Whilst the intention behind the changes may be to free-up housing supply by discouraging investors, individuals who rely on returns from their buy-to-let properties to top-up their income or use as a pension for retirement will now see their after-tax profits reduced.”
Under the current rules, individual landlords can deduct the full amount of their mortgage interest to calculate the taxable rental profit. It was announced at the summer Budget that deduction for mortgage interest will be restricted to basic rate (20%) income tax only and this measure will be phased in over four years from April 2017, until the relief is completely restricted come 2020/21.
Nimesh continued: “With interest rates expected to rise sometime in the next year, buy-to-let landlords with significant debt will see a reduction in tax relief, which will naturally result in higher costs and lower after tax profits.
“For example, a buy-to-let landlord with debt of £250,000 and interest charged at 3.25% will see their annual income tax liability increase by approximately £2,000 (if they are a 45% taxpayer).
“For serial buy-to-let landlords, they will probably look to operate their property businesses through companies as the same restrictions do not apply. In addition, the main rate of corporation tax is reducing to 18% by 2020, further increasing the difference between corporate and personal tax rates, making companies more attractive.
“However, for those with one or two properties, the associated cost and administration involved with operating a company is unlikely to make it worthwhile.”