Landlords could face tax headache if they don’t plan for Budget reforms

Michael Lloyd

March 6, 2018

Landlords that haven’t planned for changes to the tax treatment of mortgage interest announced in the 2015 Budget could face a nasty surprise, specialist lender Kent Reliance has warned.

Landlords will only be able to claim back 75% of finance costs when they file their returns ahead of January 2019. By April 2020, they will no longer be able to deduct any of their mortgage expenses from their rental income when calculating their tax obligations.

Research for Kent Reliance by BDRC Continental found that one in five (19%) landlords have already moved properties into a limited company, or transferred ownership to a spouse, to mitigate higher tax bills. And a further one in six (13%) plan to do so in the future.

However, 15% of landlords don’t fully understand the implications of taking this action, and could be in for a rude awakening when they file taxes for the year 2017/18.

Adrian Moloney, sales and marketing director at OneSavings Bank, said: “Landlords have had nearly three years to understand and prepare for the changes to the tax treatment of mortgage interest.

“Most have risen to the challenge, but a few might have quite the shock when they come to file this year’s tax return.

“As the tax year draws to a close, brokers can use this opportunity to engage with their clients, make sure they’re aware of the potential impact on their finances.

“Many landlords have sought to move to a limited company structure, or transferred ownership to a spouse but it’s not a one-size-fits-all solution so it’s vital that landlords affected seek professional tax advice.”

Small and large-scale landlords are split on the decision to incorporate. Some 58% of smaller landlords, those with one to five properties in their portfolios, do not think they would benefit from changing to a limited company or transferring ownership.

This figure drops to 27% for larger professional landlords with more than 20 properties in their portfolios, well below the average of 53% for all landlords.

Kent Reliance saw a surge in borrowing for limited company lending in 2017. During the first three quarters of 2017, seven in 10 buy-to-let applications for house purchase were via a limited company, up from 45% in 2016 as a whole.

Furthermore 41% of landlords surveyed who plan to buy property expect do so within a limited company – compared to just 24% who expect to buy as an individual.

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