How landlords can counter new property tax shocks: buy-to-let entrepreneur

EDINBURGH: A new property tax regime is set to hammer rental income, making residential real estate less attractive. Here, a letting expert shares some ways to reduce costs and increase rental profits. James Davis, an entrepreneur who has established successful online letting agency Upad, (has subsequently gone into liquidation – updated 22 October 2019) highlights how legislative changes will impact on landlords. Expect a double-digit increase in your taxable profit over the next year. That’s just for starters. Changes will be phased in over the next four years, with landlords set to struggle to contain rental increases. In addition to running a property-focused business, Davis has a substantial buy-to-let portfolio so he’s got a close eye on this investment class. – Jackie Cameron

By James Davis*

James Davis
Property tax insights: Taxable profit is set to sharply increase for landlords in the next two years, warns property industry entrepreneur James Davis.

With the Government now almost two months into rolling out Section 24 and its new buy-to-let tax relief system, online letting agent Upad.co.uk has revealed that its landlords will see an average 13 percent increase in their taxable profit from 2017/18 to 2018/19.

The changes which started being phased in on 6th April 2017 mean that landlords must now pay tax on turnover, rather than the difference between rental income and mortgage interest.

Until April, landlords could deduct the full cost of their mortgage interest payments, or any other property finance, on their rental properties before they paid tax.

Two months in, mortgage, loan and overdraft interest costs can no longer be considered in calculating taxable rental income.

The changes will be phased in gradually over the next four years, and by 2020, 100% of buy-to-let finance costs will be restricted to the basic tax rate of only 20%.

Despite the changes being gradually introduced over the next four years, our latest research shows already how out of pocket landlords are set to be by 2018/19 alone, as they see a big rise in their tax bills and a substantial hit to their profits.

Property tax bills: Landlords brace for ‘substantial hit’ to profits

Those who are in the higher rate tax bracket of 40% will be the worst affected but others could find themselves being tipped into the higher tax bracket despite their income not having increased, which will leave many renting at a loss and subsidising their property every month. 

Blossom hangs from a tree near residential properties in Rutland Gate in London, U.K., on Monday, April 18, 2016. Photographer: Simon Dawson/Bloomberg

The research by the UK’s largest online letting agent also revealed that 20% of landlords will increase rents to help mitigate the cost of their new tax bill, meaning tenants could face a permanent increase in rent as a direct result of the changes.

Rent rises are likely to be deeply unpopular with tenants so landlords will need to think about adding some cost-effective, tax deductible improvements to their properties that justify asking for an increase. For instance, by providing complimentary Wi-Fi, upgrading the appliances or giving the kitchen or bathroom a makeover.”

There are other ways that landlords can reduce their costs and look to increase their rental profit.

You may need to sell off some low-yielding property, reduce some of your mortgage payments or change the ownership of your portfolio to protect the profitability of your business.

Fully furnished holiday lettings exempt from property tax changes

Options include setting up a company to buy property or if you already own a rental property as a private individual, you could transfer it to a limited company. Alternatively, if you own the property with a lower rate tax payer, you can transfer more of the rent to them to limit your overall tax bill.

Another option could be to switch to fully furnished holiday lettings as these are exempt from the tax changes so you can still claim full mortgage interest tax relief.

Landlords should also look at ways to negotiate with their letting agent and be vigilant to agents trying to increase their commission or other fees, as they look to flesh out their profits following the ban on tenancy fees. Landlords can minimise the impact of the tax changes through saving money spent on advertising and tenancy set-up by using an online letting agent like ourselves.

Landlords can find out what the Government’s new tax changes mean for them, by using Upad’s online budget calculator tool: https://info.upad.co.uk/new-budget-calculator.

  • James Davis, CEO and founder of Upad.co.uk, an online letting agency, rapidly growing and disrupting the traditional high street letting agent model. It has serviced over 12,500 landlords. It allows landlords to get property advertised on Rightmove and Zoopla (at a fraction of the cost).
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