Depending on your circumstances, tax could be an important consideration when making an investment. With the tax rules on buy-to-let properties changing, now is a good time to assess your position, and check you’re prepared.
One of the biggest recent changes is the phasing out of mortgage tax relief for owners of UK buy-to-let property in the UK.
Between April 2017 and April 2020, this relief will be phased out, affecting what landlords with mortgages on buy-to-let properties can offset against UK tax.
The changes do not affect furnished holiday lets or commercial property.
How is UK mortgage interest relief changing?
Up until April 2017 landlords of UK Buy to Let properties were able to deduct mortgage interest costs and allowable expenses from rental income when declaring profits to HMRC. Landlords would then be taxed in the UK on the profit.
Over the next four years the level of mortgage interest you can claim tax relief on will drop from 100% in 2016-2017 to 75% in 2017/2018, 50% in 2018/2019, 25% in 2019/2020, and to 0% from 2020.
Landlords will instead receive a reduction on their final tax bill of up to 20% of mortgage interest costs. This will be the same for all tax bands, which means that landlords with taxable income near the upper threshold of a tax band may end up moving into a higher bracket, depending on both rental income and other income beyond property.
According to the National Landlords Association (NLA) the loss in tax relief will push over 400,000 UK resident lower-rate tax payers into a higher bracket.
The change will be most likely to have the biggest effect on UK higher rate tax payers.
For expats total tax liability will of course also depend upon the tax rules and rates in their country of tax residency and whether that country has a double taxation agreement in place with the UK.
Expat landlords should also remember that that the previous HMRC wear and tear allowance that allowed landlords to deduct 10% from profits each year from furnished properties no longer applies. Instead, landlords need to keep a record of all repairs and can claim for these instead.
From 2018, agents will also be banned from charging tenants fees for services. If agents push fees over to landlords, costs may rise, thus potentially pushing up rents.
What can I do?
Everyone’s situation is different, particularly when you are an expatriate, where differences in UK/local tax rates, methodology for taxing rental income and availability of double taxation agreements can all impact total tax liabilities. Depending upon your individual circumstances the changes could have little impact or potentially significantly change returns from existing and future Buy to Let investments.
If you are concerned about the impact of the changes it is important to take professional advice from a qualified and experienced party who understands both the HMRC approach to taxing rental income and how that might interact with liabilities in your country of tax residency, to ensure you are structuring your UK buy-to-let properties in a way that works best for you.
Of course the taxation of rental income is just one element to consider, along with for example, Capital Gains and Inheritance.
Regardless of what you decide to do, it is always a good idea to take stock of your property portfolio and ensure that you’re getting the best rent possible, to help maximise your investments.
Long term investment potential
According to a recent report by Knight Frank, around five million households in the UK are in privately rented accommodation, with numbers expected to rise to 5.9 million – 24% of the UK population – by 2021.
While some areas, such as prime central London, may have experienced a small dip in rents this year, rents are expected to rise over the longer term, with increasing numbers of baby boomers renting, and young professionals renting for longer before buying a home.
80% of lettings agents expect rents to rise in 2017 according to the Association of Lettings Agents (ARLA), while the Royal Institute of Chartered Surveyors (RICS) predicts rents will rise by 20% over the next five years.
Source: Skipton International