The well documented changes to tax relief for buy to let landlords is having a serious effect on the property market.
First time buyers are finding more property available as buy to let landlords sell off their portfolio, this is also great news for the wider range of investment products on the market and in particular alternative investments.
Until recently alternative investments have been considered off the wall and high risk , however in the last couple of years they have become more mainstream as investors look for high yield income producing investments.
We at Katar Investments LTD have a carefully selected portfolio of investment products that offer security, high returns and capital appreciation, with entry levels to suit most budgets.
Buy to let turmoil continues :
Landlords could in future struggle to make a profit following the chancellor’s decision in the 2015 Summer Budget to cut mortgage interest tax relief.
At the moment, landlords can claim tax relief on their mortgage interest payments. In other words, they can offset the cost of the mortgage interest from the rental income when they calculate their profits.
So, if a landlord collects rental income of £10,000 a year, but pays mortgage interest of £9,000, the profit is the difference between the two, or £1,000.
Landlords pay tax on their profits according to their income tax band. So, in this simplified example, a basic-rate taxpayer would pay 20% tax on £1,000, or £200, and keep £800. The tax bill for a 40% taxpayer would be £400, leaving £600, or £450 for a taxpayer at the 45% additional rate, leaving £550.
If you are a higher-rate taxpayer, the new tax will wipe out your returns if your mortgage interest is 75% or more of your rental income. The threshold for additional-rate taxpayers is when mortgage interest reaches 68% of rental income, according to Smith & Williamson, the accountant.
The tax liability of a basic-rate taxpayer is unchanged. However, the new profit calculation could push a basic-rate taxpayer into a higher tax band.
Limited companies are not affected by the changes to mortgage interest tax relief.
Many landlords are therefore setting up a company to minimise the impact of the new tax regime. However, it’s important to remember that HMRC will treat any transfer of ownership of a property as a sale, so there could be a capital gains tax bill to pay (making expert advice essential for most private landlords).
The mortgage options might also be limited because lenders offer a restricted choice of home loans to companies.
A landlord could also transfer ownership of the property to a spouse or partner who is in a lower tax band. But again, there are CGT implications. You also have to be careful that the property ownership does not lift the spouse into a higher tax bracket.