Buy-to-let Landlords - it's Time to Start Planning for Tax Changes
Property business owners, particularly buy-to-let Landlords, are likely to be hit with a number of quite dramatic changes in their tax status. One of the most draconian is the gradual disallowance of tax relief for finance payments that is due to start in April 2017.
In essence, from April 2017, finance charges will be progressively disallowed and replaced with a tax credit fixed at 20% of the cumulative charges disallowed.
The changes will have the most impact on Landlords who have borrowed heavily to grow their property portfolio. Landlords affected will suffer a possible two-fold, and negative impact on their property business.
Firstly, if your present claims for mortgage interest and other finance charges are reducing the amount of higher rate tax you are required to pay, once the present changes are fully implemented by 2020, your tax bills will increase as tax relief will be limited to the basic rate.
Secondly, if your present claims for mortgage interest and other finance charges are reducing your taxable property income, such that you pay no higher rate tax, when these charges are disallowed your taxable income will increase, possibly into the higher rate bands, and for the first time you may become a higher rate tax payer. You will still get some relief for finance charges paid but only at the basic rate.
In both cases, the amount of cash generated, after tax, will reduce. If your letting occupancy rates fall, the loss of cash flow will be exaggerated by increased tax bills and, as an investor Landlord you may face tough choices.
Planning is absolutely key. If you feel you may be affected, and have not taken professional advice thus far, please call HowdenWhite to discuss the effects on your property business cash flow, and strategic ideas to minimise the downside consequences.