Buy to let landlords in the UK could see an average 13% increase in their tax bills due to the reduction in mortgage relief and other change which will have a substantial effect on their profits, it is claimed.
The mortgage tax relief changes introduced in April, which are being phased in over the next few years, mean that interest relief on buy to let mortgages is being gradually reduced. By 2020 some 100% of buy to let finance costs will be restricted to the basic tax rate of only 20%.
According to the research from online letting agent Upad the difference between tax due to be paid in the 2017/2018 financial year and 2018/2019 will be an average of 13%.
It also found that 20% of landlords will increase rents to help mitigate the cost of their new tax bill, meaning tenants could face a permanent increase in rent as a direct result of the changes.
‘Despite the changes being gradually introduced over the next four years, our latest research shows already how out of pocket landlords are set to be by 2018/2019 alone, as they see a big rise in their tax bills and a substantial hit to their profits,’ said James Davis, Upad chief executive officer.
‘Those who are in the higher rate tax bracket of 40% will be the worst affected but others could find themselves being tipped into the higher tax bracket despite their income not having increased, which will leave many renting at a loss and subsidising their property every month,’ he explained.
‘Rent rises are likely to be deeply unpopular with tenants so landlords will need to think about adding some cost-effective, tax deductible improvements to their properties that justify asking for an increase. For instance, by providing complimentary Wi-Fi, upgrading the appliances or giving the kitchen or bathroom a makeover,’ he added.
According to Upad, there are other ways that landlords can reduce their costs and look to increase their rental profit such as selling off some low yielding property, reducing some mortgage payments or setting up as a limited company. Another option is to switch to fully furnished holiday lettings as these are exempt from the tax changes so you can still claim full mortgage interest tax relief.
‘Landlords should also look at ways to negotiate with their letting agent and be vigilant to agents trying to increase their commission or other fees, as they look to flesh out their profits following the forthcoming ban on tenancy fees in England, Davis added.