20% of landlords still do not understand tax changes
A fifth of UK landlords do not understand the implications of the government’s reduction in tax relief, despite the changes coming into effect on 6 April, a report has revealed.
According to Paragon Mortgages’ PRS Trends Report covering the first quarter of 2017, 7% of landlords disclosed they do not understand the changes which prevent them from being able to deduct mortgage interest costs from their taxable profits on property, furthermore 13% said they require more information.
The number of landlords who say they do understand the changes, however, has risen to 78% up from 71% in Q4 2016.
What are the changes?
As of 6 April 2017, landlords can no longer deduct mortgage interest costs from their taxable profits on property, bringing in a new higher rate tax regime for buy-to-let investors.
In the series of changes phased in over four years to April 2020, the tax relief that landlords of residential properties can set against finance costs will be restricted to the basic rate of income tax - landlords now have to pay tax on total income, including all rent, before claiming a tax reduction of 20% by 2020.
Regardless of whether you live in the UK or abroad, if you let property in the UK, the only exemption landlords have are furnished holiday lets, let properties in a limited company tax wrapper, or if they are still basic rate tax payers after rental income.
Ex-Chancellor of the Exchequer George Osborne announced the change in the Summer Budget of 2015, which has already led to a 16% market contraction, according to Council of Mortgage Lenders figures, with a further 15% slowdown expected this year by Legal & General.
Prepared landlords have been reshaping portfolios to sell off the lowest-yielding properties for some time, moving homes into limited company wrappers or preparing to raise rent, although many landlords are likely to be surprised by the higher tax liability as the tax changes start to bite. The National Landlords Association has estimated the changes will push an extra 440,000 landlords into the higher rate tax bracket.