No let-up for landlords

Published by Hannah Nemeth on 22 November 2016.
Last updated on 23 November 2016

Monopoly board

Next year will be challenging for landlords – whether they are individuals owning one or two properties or a whole portfolio.

Currently, landlords can deduct their costs – including mortgage interest – from their profits before they pay tax. Landlords can claim tax relief at their marginal rate of tax of 20% for basic-rate taxpayers, or 40% and 45% for higher- and additional-rate taxpayers. But from April 2017, planned changes to landlord taxation will start to be phased in, and this tax relief will be removed entirely by April 2020. Instead of being taxed on profit from their rental income, it means that landlords will, in effect, face a tax on their turnover.


In contrast, landlords who operate through limited companies can continue to claim mortgage relief as a business expense.

This new tax burden comes on top of the introduction in April 2016 of a 3% surcharge on
stamp duty for second homes and the removal of the wear and tear allowance, which means that landlords can no longer deduct 10% as a tax break for wear and tear, but can only claim for costs they actually incur.

A legal challenge brought by landlord lobby group Axe the Tenant Tax and represented by Cherie Booth QC (aka Cherie Blair) in October, hoped to overturn these new tax rules. The group argued that the new tax will deny individual landlords the same rights as businesses, but its case was rejected by London’s High Court. Ms Blair, whose family is reported to have a rental portfolio of 37 properties, described the new rules as “manifestly unfair”.


Increased tax liability

Paying the extra tax is unlikely to cause a great deal of hardship to the wealthy Blair family, but it is surprising to see how sorely the new rules will affect ordinary basic-rate taxpayers.

According to the National Landlord Association (NLA), the planned changes to landlord taxation will see 440,000 landlords who pay the basic rate of income tax at 20% forced up to the higher rate income tax bracket, paying 40% from April 2017.

Research published by the NLA in September asked nearly 800 landlords how much they spent on mortgage interest payments each year and how many properties they let out. Analysing the results, the NLA has calculated (see below) how much landlords pay on average in mortgage interest payments each year, which they can currently deduct from their declarable tax, but will no longer be able to do so by 2021.

Chris Norris, head of policy at the NLA, says: “A very large proportion of our members say that they will have to increase rents quite significantly – and not every marketplace in the UK will sustain that. Where this option isn’t open to them, they will have to sell at least some of their property portfolio, if not exit the market completely.

“What we are less clear about is exactly who the buyers will be for those properties. The demographic the government is desperately trying to target is first-time buyers or second steppers.

In reality, a lot of the poor- performing property that landlords need to sell won’t necessarily be suitable for these kinds of buyers. It will either be larger shared occupation or in areas that are dominated by households that first-time buyers don’t necessarily want to live among – students, for example.”


Mr Norris warns that while smaller investors may be forced to sell up, the new tax rules may benefit unscrupulous landlords. “We’re curious to see whether there is a new generation of corporate landlords who want to pick up the slack. But we’re also nervous that there is a small cohort of criminal landlords who won’t be worried about the new tax rules because they don’t pay any tax,” he says.

Smaller landlords targeted

Charles Curran, principal at Maskells estate agency, says that the new tax rules come at a difficult time when other factors are coming into play. These include an increase in capital charges for banks, to be phased in between 2013 and 2019, which is likely to push up mortgage rates, and a minimum 5.5% interest rate stress test agreed by the Prudential Regulatory Authority, coming in from January 2017 (except for fixed-rate mortgages over five years), which will force many buy-to-let mortgage holders to remain with the same lender.

“Inevitably, all these regulations are driven towards individual landlords,” he says. “The new rules on mortgage interest relief won’t apply if your properties are incorporated – it’s a business as opposed to a personal investment.”

“I think a lot of leveraged buy-to-let landlords [those who have borrowed a lot of money] will be forced to sell, particularly those who have a fixed rate mortgage deal that ends in two years’ time. If you’ve got a big mortgage, you will be in a lot of pain,” he warns.

But not everyone thinks the new tax rules are a bad move if landlords who have taken on too much debt are forced to sell up. Lee Grandin, managing director at, says: “I think it’s remarkable what the government has done. The new tax rules will benefit first-time buyers, but also the most successful landlords who can run a structured business that is cost effective.

What will happen is that first-time buyers will take up properties offloaded by individual landlords, while corporate landlords will get larger because they will have the experience and a better tax structure.

“There will continue to be landlords who buy one or two properties, maybe with a very small mortgage or no mortgage at all – you can still buy a property without a mortgage and you’ll be no worse off. But using a mortgage is fundamentally flawed if it’s based solely on optimism that house prices will keep rising – that needs to stop.”


Rob Bence, director of The Property Hub, says that it is ‘accidental landlords’ who will quit the market. “Landlords who decide to sell up will most likely be those who have a buy-to-let property ‘by accident’ in that they were left it by a relative or they owned a property before moving in with a spouse. For such property owners who are not necessarily committed to the sector, anything that makes buy to let more difficult or costly will prompt them to sell up.”

But he believes that seasoned landlords will not be deterred. “There are plenty of solutions on offer, including the much talked about limited company route. Landlords could also utilise their spouse’s unused tax allowance to minimise the impact,” he suggests.

Michelle Niziol, director of IMS Property Solutions, and the first contestant to be fired from 2016’s The Apprentice, agrees that landlords need to think laterally about their investment.

“Those looking to build small to medium-sized portfolios, who want to become semi professional landlords and use their properties to give them a monthly income need to be cleverer with how they buy and what they invest in. Rather than buying finished products, they may find they are better off buying properties that need work so that they are spending less up front and adding value by renovating.

“Alternatively, look at how a budget can be stretched further with smaller multiple purchases in different areas of the country, so that tax thresholds can be utilised,” she advises.

So 2016 could see landlords who are mortgaged up to the hilt sell up, along with those who are not serious about their investment. But for professional landlords who choose the company route or those with little or no mortgage, buy to let still remains a sound proposition.

Pushed into a higher tax bracket

A landlord owns a property worth £288,000. He has a 75% loan- to-value mortgage of £216,000, with a 5% interest rate. His annual mortgage interest is £10,800 a year. He has a net rental income of £12,000 a year. Minus his mortgage interest costs, he makes £1,200 in real rental profit.

He also has a job that pays £40,000 a year, so together with his rental income his total taxable income is £41,200.This makes him a 20% basic-rate taxpayer and he will pay £6,040 in tax.

Under the new rules, he will have to include the £10,800 mortgage interest in the tax he declares, which will make his taxable property profit £12,000. This leaves the landlord with a taxable income of £52,000. Now a higher-rate taxpayer, he will pay £7,840 in tax – £1,800 more than he pays now.

The ‘real’ rental profit of £1,200 was initially taxed at 20%, making the tax due £240. Under the new rules, the tax payable increases by £1,800 making a total of £2,040 tax payable.Therefore the tax liability wipes out the ‘real’ rental profit and leaves him with a further liability of £840, which he will have to pay out of other income or savings.

Click on the table below to enlarge:

Should you switch to a limited company?

Donna McCreadie, a buy-to-let taxation specialist at Perrys Chartered Accountants, says: “For those considering going limited, I would strongly recommend that they don’t rush into anything and do their homework first by running through their options with a professional accountant to see which is the best ownership structure for them.”

Here, she looks at the key points to bear in mind.

  • Limited company profits are subject to corporation tax at only 20%, reducing to 17% over the next few years, meaning that higher-rate taxpayers might benefit from holding long- term investment properties in a company structure.
  • If you plan to pass on your properties to your children, a company structure may be more flexible in terms of inheritance tax and stamp duty.
  • If you intend to spend some or all of the profits, a company structure can be more limiting. An individual can receive dividends of up to £5,000 in the current tax year without incurring any further income tax liability. However, dividends in excess of this amount will be subject to income tax at a rate of 7.5%, 32.5% or 38.1%, depending on whether you are a basic-, higher- or additional-rate taxpayer, which is in addition to the corporation tax you’ll pay on rental profits.
  • Should you want to use the funds personally on your main residence or to gift to children, drawing equity from a portfolio within a limited company would be treated as dividend income, with additional tax liabilities.
  • You will need to spend more on professional fees when running a company.
  • With a limited company, the rates of interest may be significantly higher on refinancing the properties – more than the potential increase in tax.
  • Existing landlords will have a potential capital gains tax bill on moving their properties into a limited company; and there are also stamp duty implications on changing ownership.

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