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Reaction to Tax Changes for Buy to Let Landlords

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Although the tax status of multiple dwelling residential landlords is unlikely to change in the near future, the National Landlords Association (NLA) has announced that single property landlords are likely to see a greater tax bill in the future.

Although the tax status of multiple dwelling residential landlords is unlikely to change in the near future, the National Landlords Association (NLA) has announced that single property landlords are likely to see a greater tax bill in the future. The NLA announced last month that landlords who rent just one property are “finally waking up” to the likelihood that they will be pushed into a higher tax bracket. This follows the Treasury's introduction of new taxation regulations for the buy to let market.

The changes, which were originally announced in 2016, are now being rolled out across the country. They have attracted much criticism from landlords groups and some property commentators, many of whom have indicated that it will be more difficult for landlords to make a decent profit under the regulations. It is therefore important for landlords to understand the full implications of the changes and to take steps to ensure they are not in a position of losing money unnecessarily. According to the NLA, landlords – and their accountants – are gradually adjusting to the new regime.

Research undertaken in the buy to let market has shown that the proportion of landlords who will find themselves in a new, higher tax bracket under the current legislation has double compared with the same accounting period in the previous year. Indeed, the NLA claims that no less than 16 per cent of landlords who rent out a single property are reporting that the new rules will push them above the higher income tax threshold. 

The changes will impact on many smaller landlords in the Portsmouth area, whether they use a letting agent or not. In fact, by the time the regulations are fully rolled out all over the South East by the end of 2021, landlords from Fareham to Southsea will all see their mortgage finance costs counting towards their taxable profit, many for the first time. On average, the mortgage financing costs for a single property landlord stands at around £5,600 per annum in the UK. The rule changes mean that those landlords who are currently bringing in an income that is just below the upper limit of the basic income tax – currently £45,000 per annum - could be tipped over into the higher earning bracket of tax. This means paying 40 per cent income tax on earnings above the threshold, which for many landlords would expose them to greater tax liabilities.

Of course, some single dwelling landlords will view any new way that their earnings from property are calculated as being fair and that taxable income above the £45,000 threshold is something that they rightly should pay. However, for others the view is expressed that no greater earnings are being made – it is just they way the tax liability is now being formulated that has altered. Will the changes put off single dwelling landlords from entering the buy to let market in the future? Will current landlords choose to get out of the market altogether? Time will tell, but the NLA certainly see the potential for the market to become destabilised by the rule changes.

“[Just over] a fifth of landlords with only one property do not make a profit and... those bumped up a tax bracket will find that their ability... to provide good quality housing will be seriously affected,” said Richard Lambert, the NLA's Chief Executive Officer. “Single landlords are responsible for providing a large number of the country’s private rented homes and...[increasing numbers of] families and young couples are making their homes in the private rented sector because they cannot either access social housing or [have the necessary deposit saved]... to buy their own home.”

It is worth bearing in mind that landlords who only let out a single property are the most common type. This sector of the industry accounts for in the region of two-thirds of the country's landlord population. In order to get around potentially larger tax issues, some landlords are looking to alter their legal status to a limited company or to convert the sort of mortgage they have, for example, to one that is run on an interest only basis. Expert legal advice should be sought before taking either of these routes. Another potential option is raising the level of rent that is charged to cope with augmented tax liabilities, something that will not please tenants.