THE END OF BUY TO LET?

For Buy to Let landlords the world has changed; and it has not changed for the better. By 2020, the Chancellors change to the tax regime for privately owned buy to let property will be fully in force and will have fundamentally changed the economic model on which investors have relied upon for their success, and profit.

As of 2020 Buy to Let landlords who own their property personally will no longer be able to deduct the whole of the interest they pay on a mortgage. They will only be able to claim a tax credit of 20% of the mortgage interest.

At present the tax picture for a rental property might look like this:

Rental Income                       £20,000
Mortgage Interest                 £13,000
Taxable Profit                        £7,000
Tax at 40%                             £2,800
Net Profit                                £4,200

Once the changes have fully taken effect, the picture will be changed beyond measure:

Rental Income                        £20,000
Mortgage Interest                  £13,000
Tax Credit (20%)                    £2,600
Taxable Profit                         £17,400
Tax at 40%                              £6,960
Net Profit                                 £40

An extreme example perhaps but the lesson is clear; property investors will have to look at restructuring their portfolio or face losing their profit – this is where Winchester Bourne can help you.

There are several options open to Buy to Let landlords to prepare for the change:

  • Reduce Borrowing or Sell Up – Bringing down the overall level of borrowing across your portfolio will reduce the effect of the loss of relief. Properties with higher interest charges should be targeted first. Consideration might be given to selling low yield properties to reduce the debt on high performance properties.
  • Increase Rents – The National Landlords Association have warned that this is the likeliest response to the change and has the potential to add £840 per year to the average rent bill. It may not have the effect intended; regardless of the choke hold on housing supply the rental market still works like any other. If people feel like they are being over charged; they’ll vote with their feet.
  • Use a Corporate Wrapper – Since the new rules only apply to personally owned properties, consideration might be given to restructuring properties into a Limited Company. Care should be taken however as there are Stamp Duty Land Tax and Capital Gains Tax consideration.
  • Consider Trust Planning – Using a vehicle such as a trust to structure a portfolio can have the effect of changing the way that revenue from a property is treated for tax purposes.

If you are a property investor it seems clear that you need to start planning now. The phased approach that the government is taking is welcome, but hard and fast decisions need to be made to preserve the profitability and the efficacy of your investment.

For more information about any of the above please call Winchester Bourne on 02380 693366 or email sarah@winchesterbourne.com

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