Landlords in UK who have not taken advice face tax change headache

Landlords in the UK who have not planned for various tax changes that affect the buy to let sector could find themselves facing tax confusion as research reveals many have not fully understood the implications.

One in five landlords have moved their property portfolio business into a limited company or transferred ownership to a spouse but one in seven don’t understand the implications of doing so.

Research from Kent Reliance, part of OneSavings Bank, suggests time may be running out for those who have not taken tax advice particularly as the result of the phased abolition of mortgage interest payment tax relief bites.

It explains that the first of three reductions to the tax relief available on mortgage interest payments came into effect in April 2017, meaning landlords will only be able to claim back 75% of finance costs when they file their returns ahead of January 2019.

By April 2020, landlords will no longer be able to deduct any of their mortgage expenses from their rental income when calculating their tax obligations.

Research for Kent Reliance, by BDRC Continental, suggests that 19% of landlords have already moved properties into a limited company, or transferred ownership to a spouse, to mitigate higher tax bills, while a further 13% plan to do so in the future.

However, the research also shows that 15% of landlords don’t fully understand the implications of taking this action, and could be in for a rude awakening when they file taxes for the year 2017/2018.

Small and large scale landlords are split on the decision to incorporate. Some 58% of smaller landlords, those with one to five properties in their portfolios, do not think they would benefit from changing to a limited company or transferring ownership. This figure drops to 27% for larger professional landlords with more than 20 properties in their portfolios, well below the average of 53% for all landlords.

Kent Reliance saw a surge in borrowing for limited company lending in 2017. The lender’s data shows that during the first three quarters of 2017 some seven in 10 buy to let applications for house purchase were via limited company, up from 45% in 2016 as a whole.

Looking ahead, this purchase trend seems well supported as 41% of landlords surveyed who plan to buy property expect do so within a limited company compared to just 24% who expect to buy as an individual.

‘Landlords have had nearly three years to understand and prepare for the changes to the tax treatment of mortgage interest. Most have risen to the challenge, but a few might have quite the shock when they come to file this year’s tax return,’ said Adrian Moloney, sales and marketing director at OneSavings Bank.

‘As the tax year draws to a close, brokers can use this opportunity to engage with their clients, make sure they’re aware of the potential impact on their finances. Many landlords have sought to move to a limited company structure, or transferred ownership to a spouse but it’s not a one size fits all solution so it’s vital that landlords affected seek professional tax advice,’ he added.