Landlords feeling the pinch as tax measures begin to bite

Most buy-to-let landlords saw their tax bills increase in 2017/18, suggesting the effects of changes to mortgage interest relief were beginning to be felt one year after they were introduced.

In a survey by Paragon, 58% of landlords said their tax bill for 2017/18 was higher than a year before, with an average annual increase of £3,039.

The report said this was a result of changes to mortgage interest tax relief, which is being phased out over a four-year period and replaced with a basic-rate tax credit by April 2020.

A third of landlords said the tax they owed was either a little or a lot more than they expected.

Nearly half (49%) of landlords who reported a higher than expected increase said they would make changes to their portfolio as a result.

The most popular measures included selling property (24%), increasing rent (20%) and reducing borrowing (19%).

John Heron, director of mortgages at Paragon, said:

“The January tax [returns] deadline was the first real data point for measuring change and it’s clear that landlords are continuing to adapt their approach as the transition progresses.”

One way that buy-to-let landlords are adapting is to change their business structure, with research from Precise Mortgages showing an increasing amount of landlords are moving to limited company status.

Almost two-thirds (64%) of landlords with more than four residential properties and plans to buy more in 2019/20 will do so as a limited company, compared to 21% who will buy as individuals.

Switching to limited company status enables landlords to continue to offset their mortgage interest against their profits.

Alan Cleary, managing director of Precise Mortgages, said:

“The buy-to-let market is changing and the switch to greater use of limited company status is one aspect of the development underlining the increasing maturity of the sector.

“There are good reasons why limited company buy-to-let is dominating the purchase market and we expect that will continue to be the case this year and next.

“Customers, however, need expert specialist support when buying as a limited company or considering switching to limited company status as there are considerable costs involved.”

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