AFTER all the arguments, resistance and real concerns raised by numerous professional organisations and property experts, the Government has ignored the lot and made the Summer Budget landlord tax law on 18th November (read about it here)when it received Royal Assent and landlords will now be facing increased tax payments starting in 2017.
Basically, all landlords with mortgages will be hit hard by the landlord tax. Any interest costs they pay will no longer be allowed as expenses and they will be taxed on turnover rather than profit. If you own your let property outright then there will be no change for you – except with mortgaged landlords selling up you may be able to cash in on lower supply which means higher rents. You may even want to buy some properties from distressed landlords looking to sell before they get hit by high mortgage costs and tax at the same time. For many it could mean financial ruin.
Looming interest rate hikes will compound the new tax problem. As mortgaged landlords see costs rise, so will their taxes, when in effect, their profits are falling. For many the only answer will be to sell up or hike rents. I would expect rent hikes to accompany a fall in supply and wealthy landlords without mortgages will benefit. We can also expect big corporations to now step into the let property sector, because businesses can still treat interest payments as costs, so will have a significant advantage over the private landlords with mortgages.
But there are other solutions and here is where I am at personally with my seven buy to let properties.
1: If all else remains the same, then because I am a lower rate tax payer, my tax bill will only rise by £300 in 2020 when it come into effect – according to my accountant. I worry about the compounding effect of interest rate hikes though, so I am taking the below action.
2: I will regiment 12-month annual rent increases on all my properties. Several of these have not increased for years as I am happy with return and tenants. That is no longer possible.
3: I will pay down mortgages as fast as possible. I will use my own cash reserves in 2020 just before the impact would hit me. By then I will have cash reserves to buy 2 of my properties outright, saving the rent earned for that purpose.
4: The remaining five properties – I may well sell 2-3 of them to buy the others outright. But I will reserve judgement dependant on the state of the retail market and interest rates. As long as interest rates remain low or offset by rent increases then I will keep the properties.
5: To switch into a company would not make sense. The refinancing costs alone would be £10,000 and then withdrawing the money would be taxed after corporation tax, so heavily taxed. And CGT applies as well. Compare that to a current £300 per year tax addition and it is a no brainer to avoid putting them in a company.
Saying that, as I am a business owner, I will hopefully continue to work and any earnings I can retain in the business rather than drawing. That way I can hopefully manage my income over the coming years and avoid the landlord tax as much as possible.
Everyone will need their own strategy. The next action I will take will be to do my best to oust the Conservative Government at the next election, they have attacked my pension and are penalising me for entrepreneurship. Shame on them.