Landlords Urged To Check Their Tax Status

Changes to taxation mean that from the 1st April 2016, landlords will be taxed based on rental income as opposed to pre-tax profit.

The move comes as part of a wider range of reforms, including tax relief changes which are set to reduce the amount of mortgage tax relief higher rate taxpayers can claim back from 40/45 per cent to 20 per cent from 2017 to 2020. It was also announced last week by Chancellor George Osborne that stamp duty will be raised by 3 per cent for landlords and those buying second homes.

The changes are liable to affect higher loan-to-value mortgage holders, with concerns that they may feel inclined to sell their properties due to their lack of financial viability.

Ray Boulger, senior technical manager at John Charcol, explained: ‘In the past you added your pre-tax profit on buy-to-let to your other income and if you were highly geared your annual profit would have been quite small in some cases. This is going to push some people who were in the 40% tax bracket to the 45% tax bracket.

‘Some people will start losing their personal allowances, some people will start losing their child benefit and actually that becomes a serious impact because you’ve got two or three properties that affect you. For those people it could affect them as early as next year and I suspect a lot of them haven’t thought that through yet. You don’t need many properties in the London area to push you into that bracket.’

A further possible problem for landlords has also come to light.regarding the extra 3 per cent stamp duty for second homes coming into force in April 2016.

It would seem that with the new measures in their current form, any landlords that wish to move their family home after April 1st could be hit with the extra stamp duty cost due to the fact that they already own buy to let properties. This would certainly seem unfair penalisation to landlords that invested in buy to let property in good faith before the changes were announced.

It was suggested that an exemption written into the legislation during the current government consultations would be fair.

Boulger said: ‘There’s a simple solution and that’s for the government to say any buy to lets you already owned or exchanged to buy before 25 November will be ignored in assessing whether you’ve got existing properties.’

It remains to be seen if the government will accept that this seemingly unintentional extra tax cost on family homes is unfair, and adjust the new legislation accordingly. In the meantime landlords need to consider the implications of all the recent tax changes and how they will affect them.