There was more than one shock announcement in George Osborne’s summer budget earlier this year, but it was one in particular that stood out - the planned change in landlord tax.
We talked to Kieran Purcell, Audit Manager at Cheesmans Accountancy firm, about the changes in landlord tax; who will be most affected; and advice for those either with buy-to-let properties or anyone looking to buy to let.
PropertySales: Could you describe the details surrounding the change in landlord tax?
Kieran Purcell: Effectively, it’s going to be phased in from September 2017. What it’s all to do with is, by the year 2021 they’re only going to allow the basic rate of relief on buying buy-to-let property.
They’re going to do that by phasing it in in the next number of years and in the first year they’re going to get 75% form of relief and 25% at basic rate. Next year you get 50% of the normal relief and 50% of the basic rate. The next year it’s 25% and then 75% at the basic rate. Then in 2021 you’ll only get the basic rate relief for any interest you concur.
PS: Do you know why it’s been changed?
KP: I think they’re changing it to try and change the landlord culture around the country to try and get more first time buyers.
The government are trying encourage people to become home owners. But I think there’ll be this knock-on effect because what they’re trying to do is encourage people not to get into buy-to-let by making a bit more unattractive, and I think they’re trying to hope that that will free up more properties on the market for first time buyers.
But what I think’s going to happen is (to counteract some of this) quite a lot of landlords may stick their rent up. And by sticking rent up, it will make people in rented accommodation find it hard to get deposits together to actually become first time buyers. So it’s a vicious circle, really.
PS: Who do you think will be worst affected?
KP: Well, the very wealthy individuals won’t get affected at all because they’re more than likely not to have been borrowing on properties.
So the people that will probably be affected the most are the higher rate tax payers, who will take big hits on their tax because their additional rate has actually dropped 45% down to 20%. But it really affects those that are on the cusp of the basic rate band because they could be pushed, with these new rules, into being a higher rate tax payer.
PS: Since the announcement, has there been a noticeable slowdown of people buying to let?
KP: Not that I’ve noticed. But there’s been quite a lot of people that have been petitioning against it – last I saw there was about 25,000 signatures.
PS: What advice would you give to landlords affected by the change?
KP: It depends on the circumstance really. With married couples, there’s always the option of, if your spouse is in a lower tax bracket (or if they’re not earning any money at all) you can split the income from the property to the spouse. This means that you can make use of their lower tax band, their personal allowance and lower tax charges. That’s one option.
You could also go corporate: so effectively buy all future properties in a company. The corporation tax rates are lower and there is almost a double tax charge because once you get that money into the company, you have to pay tax to get it out again from the company. But this would be probably lower than it would personally.
The only problem with that if it’s higher value properties, you actually pay substantially higher rates than if you were buying it individually. So you actually buy it back at around 15% - so it depends on the situation really. But the thing with the company as well that you have to consider is that you have to file annual accounts, and involve accountants’ fees and administration of that particular company.
Another option would just be to increase the rates to actually get more interest in, so more rental income in to be able to pay it back.
PS: What advice would you give to those looking to buy to let?
KP: It would almost always be to look at their own personal circumstances: what the income of both of the spouses are and probably to do with the calculations on what the tax will actually do – not just now but once the rules come into effect in 2021. And probably compare that to what the tax would be if they had it in a company.