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Options for landlords after Osborne’s mortgage interest tax relief cuts – an experienced landlord’s view

Friday 25 March 2016

The tax changes Chancellor George Osborne announced in the 2015 Budget and Spending Review sent shockwaves through the world of buy-to-let.

And there is no doubt in my mind that the buy-to-let mortgage interest relief cuts and stamp duty surcharges were the product of a clear strategy – to create a private-rented sector contained within a neat corporate structure which can be taxed and more easily regulated and free up property for owner-occupation.

At least that’s the theory.

With regard to the imminent changes to the tax relief on buy to let mortgage interest, it’s important to understand if and how the changes will affect you in order to plan your response.

If you own a buy to let property or a portfolio of properties and they are unencumbered with high loan-to-value mortgages then this new measure will not impact you at all.

If you are a low-rate taxpayer and adding your property income to your overall income does not take you into the higher rate tax bracket, then this change in policy will also have little if any impact on you.

And if you run your property business through a limited company then you will also remain unaffected by this policy change as the profits on your properties will be handled via company taxation policies.

For all those landlords who don’t fall into the above categories then the bad news is this change in policy will have a significant impact on your business.

And while panic may be kicking-in I would urge you to stop, take stock and think about your options thoroughly before making any rash decisions.

The first and most obvious choice is to increase the rent – a somewhat obvious strategy and considered highly risky by a few well-respected economists.

While supply and demand will ultimately drive rental prices there are also many other factors that contribute and put simply landlords are not in a position to just name their price.

Instead, you might consider looking at all areas of your business for cumulative savings.

Ways if doing this include looking to reduce your mortgage interest by locking into longer term deals, switching insurance companies or tweaking your insurance policies to realise savings.

You might also think about finding better-priced contractors for your maintenance works and perhaps even switching letting agents to secure better deals on tenant-finding services and property management.

These measures alone could go a long way to addressing the income gap after the tax changes come into force.

Transferring properties into a limited company

But if the books are still in the red you might consider transferring properties into a limited company.

This, in effect, is like selling your property to a company which you own but I would urge any landlord to ensure they get solid advice in relation to personal circumstances from an accountant or tax advisor as this could result in capital gains tax and stamp duty land tax counteracting any savings made – especially for landlords with very small portfolios.

Ultimately, if you are a multiple-property landlord with big mortgages it may be time to streamline a little and consider selling the lowest yielding properties to pay off debt on the remaining ones - thus reducing the exposure to mortgage interest.

Personally, I have always bought properties as a limited company rather than as an individual, apart the exception of a handful of properties I purchased at the beginning of my property career.
 
So, while I would be largely unaffected by the changes I still need to take action in relation to those properties as they are subject to buy-to-let mortgages.

It’s highly likely that I will sell those properties and reinvest the funds in other property projects which are contained in limited companies.
 
Whatever you decide to do in response to the introduction of this policy change, be sure to seek professional advice and be certain of how it might affect your personal circumstances and your specific property business before making any decisions.
 
Carl Agar,
Landlord and Investor
Managing Director of Big Red House letting agents
Founder of the Home Safe Scheme
Yorkshire representative of the National Landlords Association

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