As the April announcement of the 2017 budget looms, landlords are very concerned about further possible changes to tax relief which would have a big impact on their rental income.
The first wave of changes was implemented in 2015, and affected mortgage interest relief and stamp duty land tax on the finances of landlords, ultimately meaning that landlords would be paying higher tax and therefore have a lower income available.
As a way of beating these changes, more than 100,000 landlords have since formed limited companies, because these new rules do not apply to limited companies.
This went hand in hand with an increasing intention on the part of landlords to apply for commercial loans as a way of funding the expansion of their property portfolios. Although these loans are available to regular landlords, it is far easier to apply if you are a registered limited company.
Professor David Miles of Imperial College failed to see “any rationale for the tax changes announced in 2015”. If the intention was to improve the lives of those who rent property, it appears to have backfired, and Professor Miles believed it has actually had a “negative effect on the supply of privately rented property”.
Research undertaken by the National Landlord Association (NLA) reveals that over the past 18 months, the number of landlords trying to fund their purchases using commercial loans has doubled, in a bid to offset the imminent changes in Buy To Let (BTL) tax. The research shows the figure grew from 10% in July 2015 to 19% by the end of 2016.
These changes to BTL tax are due to be announced in April as a part of the 2017 budget. They will prevent landlords who currently have BTL mortgages from deducting their interest payments or any other finance-related costs from their turnover before declaring their taxable income.
This will mean landlords will have to pay higher taxes, and therefore take home a smaller income. They will not incur this loss themselves, but will more likely pass it on to the tenants by increasing rental prices. However, landlords may also have found another way to dodge this second tax hike.
Currently the trend has been for landlords to establish themselves as limited companies, but this will no longer protect them from the tax hikes. Instead, many landlords are now considering registering themselves as incorporated companies in order to preserve their mortgage interest relief.
Between January 2016 and January 2017, the proportion of landlords in the UK who said they would become incorporated rose from 1% to 6%, increasing the total from 20,000 to 120,000.
Landlords have been advised not to jump the gun and start to incorporate themselves just yet, because until the budget is passed this all remains to be seen.
To find out more about landlord insurance, visit our dedicated page. QuoteSearcher will put you in touch with a panel of brokers who can provide competitive quotes for all types of landlord insurance.