CIOT highlights looming landlord taxation changes

Landlords should be “cautious about making any knee-jerk moves” in response to changes to the taxation of residential landlords, CIOT has said.

Next month, the first phase of a process to restrict the amount of tax relief for residential landlords to the basic rate of tax will enter into force. The changes mean that from April 6, 2017, 25% of mortgage interest will be restricted to 20% relief. 50% of interest will be restricted in 2018, with all interest restricted from 2020 onwards.

The restriction works by “disallowing finance costs in calculating the taxable rental profit, and then introducing a tax credit equal to 20 per cent of the disallowed costs”, said CIOT.

Brian Slater, chair of CIOT’s property taxes sub-committee said: “This is one of the most significant changes to the buy-to-let market in decades and will particularly affect heavily geared buy-to-let landlords. However, it is sensible for landlords to be cautious about making any knee-jerk moves in response to the changes.

“A decision to sell properties may be tempting for those that are highly geared, meaning they are carrying a lot of debt from perhaps buying many properties or a couple of expensive ones and can no longer benefit from the relief.

“Helpfully the change is being phased in over four tax years, so that the full effect of the restriction will not be felt until tax year 2020-21. This will give landlords extra time to consider their options.

“Taxpayers may have to decide whether to continue in buy-to-lets with reduced profits or simply sell their properties, which may impact on the number of houses and flats available to buy. Or such people could move into commercial property renting, but they will find that to be a more specialised field.”

“The restrictions apply to individual landlords and not to companies, which will continue to receive relief for mortgage interest and other finance costs in the usual way. This means that the change may impact on the look of the rental landscape in the future if many individual landlords choose to incorporate and become companies, although this is not without difficulty and incorporation itself can involve tax charges; these may be stamp duty land tax on the market value of properties and possible capital gains tax on properties transferred into a company,” Slater added.

Related reading