Buy-to-let Landlords are set to see a sharp increase in their taxable profit over the next two years, forcing them to mitigate the cost by increasing rents.
According to online letting agent Upad.co.uk, landlords will see an average 13% increase in their taxable profit from 2017/18 to 2018/19.
Following the changes to mortgage tax relief introduced in April, landlords must now pay tax on turnover, rather than the difference between rental income and mortgage interest.
Until April, landlords could deduct the full cost of their mortgage interest payments, or any other property finance, on their rental properties before they paid tax.
Mortgage, loan and overdraft interest costs can no longer be considered in calculating taxable rental income. The changes will be phased in gradually over the next four years, and by 2020 100% of buy-to-let finance costs will be restricted to the basic tax rate of only 20%.
Landlords 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.
The research also revealed 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.
James Davis, CEO and founder of Upad.co.uk, said: “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 suggested landlords could limit the impact of tax relief changes by selling off low-yielding property, reducing mortgage payments or setting up a limited company.
“Options include setting up a company to buy property or if you already own a rental property as a private individual, you could transfer it to a limited company,” he said.
“Alternatively, if you own the property with a lower rate tax payer, you can transfer more of the rent to them to limit your overall tax bill. Another option could be 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 can find out what the government’s new tax changes mean for them by using Upad’s online budget calculator tool.
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