Changes to taxation on allowable expenses for rental properties are coming into effect from April 2017, which all landlords should be aware of and be planning ahead for. Allowable expenses for landlords include mortgage interest, repair costs and interest on loans for furnishings.

As mortgage interest is usually the biggest allowable expense for those who own rental property, the gradual introduction of basic rate tax relief on mortgage interest is of most concern, effectively meaning that landlords will be taxed on their turnover and not just their profit going ahead. To protect from potential losses, here are 3 points all landlords need to consider when it comes to the new buy-to-let taxation.

 1.     The numbers

Up until now, landlords have been able to subtract their mortgage interest from total rental income before submitting their final income to the tax office annually, organised by which tax bracket they fall into. Basic rate taxpayers have received 20% tax relief, and those at a higher rate have seen 40% relief, while top-rate taxpayers could claim 45%.

Over the coming years, a decrease in how much mortgage interest you are allowed to offset against your rental income will be gradually introduced, heading towards 2020 when all landlords will have the same tax relief at the basic rate of 20%. These changes will come into effect from April of each year at the start of the new tax year and are applicable to all UK landlords.

In the 2017/18 tax year, tax relief will be split so that you can claim 75% of allowable expenses, and will receive relief at the basic-rate (20%) on the remaining 25%. In 2018/19, this will change to a 50/50 split between the two. In 2019/20 you will only be able to claim 25% of allowable expenses, receiving 75% of expenses at 20%. In 2020/21, the switch will be complete, with the only tax relief being the basic-rate of 20% on your allowable expenses.

These changes will be of most concern to higher earners. Landlords who have been well within the basic rate tax bracket will see no change, but those who are near to the limit of the basic-rate tax band are also likely to end up paying more tax. Landlords on higher incomes will find themselves losing much more in mortgage interest payments.

This calculator from the Rental Landlords Association will help you work out if you’ll be paying extra tax and how your finances might look heading towards 2020.

 2.     The options

Think about reorganising the income you receive from property you let. If you have multiple properties, it might make sense to consider selling some and remortgaging others to reduce the borrowings and fix rates longer where possible. Rearranging your finances, by assigning rental income to a spouse who earns less, can act to exploit their personal tax allowance, which is actually due to rise to £12,500 by 2020. Your estate agent will be able to advise whether an increase in rental charges is reasonable in comparison to the local market, again helping to solidify your income.

Some landlords may consider becoming a limited company since corporation tax is simultaneously being cut to 18%, with interest for limited companies being classed as a business expense and therefore fully deductible against income. This may be a particularly good option if you have multiple properties but there is still some weighing up to do in advance, as you will need to sell your property to any new company created, triggering other costs such as stamp duty and capital gains charges. You also need to consider how you will access your income from the company, whether as a dividend or a salary, a further complicating and potentially costly step.

3. Expert advice is available

As this is a complex area, landlords should seek expert advice before making any lasting decisions. At Caledonia Bureau we are more than happy to sit down to discuss your current position and how we can help you manage any changes ahead, helping to secure your property finances as best as possible. Get in touch with us today or pop in for a chat at one of our local branches to see how we can help.

As one of the West of Scotland’s longest-standing estate agents, we have had lots of experience managing the ups and downs of the housing market in recent times, so you can be confident you’ll be in safe hands when working with us. With an expert team by your side and a variety of properties on offer, including both property to let and homes for sale, Caledonia Bureau are confident that we can match you with the right home. Give our friendly team a call today, choosing from our offices in Clydebank, Helensburgh, Dumbarton and Paisley.