Buy-to-let investors must act to beat tax crackdown

Tax specialists have urged buy-to-let landlords affected by Chancellor George Osborne’s tax crackdown to act now to ensure their sums still add up.

Landlords could lose thousands of pounds per property after the Chancellor announced a crackdown on higher rate tax relief in his emergency Budget in July, to be phased in from April 2017.

Specialist accountants have warned that amateur landlords face a severe dent in their profits.

Now accountancy firm Baker Tilly has urged affected landlords to reduce their finance costs ahead of the change.

Gary Heynes, head of private client, said investing cash and borrowing for property may have made sense to some, but may not work any longer.

“With the changes meaning an extra 20% or 25% or even 40% tax on the finance costs, it may now be better to repay borrowing rather than keep cash invested.”

Others may consider rethinking who owns the property, he said “If held in a sole name, it may be better to transfer to a spouse or civil partner either entirely or partly.

“While this should be free of capital gains and inheritance tax, a stamp duty liability could still arise.”

Heynes added: “It may even be worth considering transferring in whole or in part to adult children. Again, there may other taxes due in doing so, but the income tax and future inheritance tax savings may make it worthwhile.”

He said other landlords with many properties might consider transferring their activities to a company. “They could qualify for incorporation relief which could significantly reduce any tax cost of transferring their property business.

“Companies only pay tax at 20%, and this rate should be reducing in the future, so the impact of finance cost restrictions will be greatly limited.”

The Government estimates that when fully implemented, the restriction to basic rate relief on finance costs will raise an extra £665 million.

Heynes said: That’s a lot of money, but bear in mind that HMRC’s own figures say that only 20% of landlords will be affected. The other 80% presumably only pay tax at the basic rate or have no borrowings are unaffected.”

He noted that landlords will take a further hit in the form of the replacement of the wear and tear allowance for furnished lettings.