Tax danger: Landlords are running out of time

Top 40 advisory firm, Bishop Fleming, says residential landlords need to act in response to onerous tax hikes being inflicted on them.

The firm, which delivers accounting, tax, corporate, restructuring and advisory services to businesses and private wealth advice to individuals, says key tax changes are hurting the buy-to-let market, making the UK one of the worst countries in Europe to be a residential landlord.

Bishop Fleming's Head of Tax, Andrew Browne, remarked that a gradual phasing out of mortgage tax relief, introduced in April 2017, is causing the greatest fear amongst the buy-to-let sector, as it results in affected landlords who take no action renting at a loss and being forced out of the market. By 2020, mortgage interest relief on residential lets will be capped at just 20%.

The cap pushes basic rate taxpayers into higher taxes and leaves higher-rate taxpayers with substantially larger tax bills, as more rental income is exposed to income tax.

But as the cap only affects individuals, some landlords are migrating to companies to avert the tax hike.

However, such a move is not without its dangers, warned Mr Browne. The Bishop Fleming Partner explained: "I would caution against transferring personally owned properties into a company to save tax without thinking through the consequences, as it is not always the most sensible move, and may prove to be an expensive mistake in terms of capital gains tax, stamp duty and inheritance tax, as well as the extra re-mortgaging costs."

Mr Browne continued: "Even where properties are transferred, tax will only be saved where the money is left in the company, as taking it out will result in the payment of dividends tax."

Two other tax changes introduced in April 2016 are also hitting residential landlords: a 3 per cent stamp duty surcharge on second home buyers, and the loss of the 10 per cent tax break for "wear and tear".

Mr. Browne suggested a number of alternative options for affected landlords looking to avert a tax crisis, including rental increases, disposals of low yielding properties, self-managing to save on letting agent's fees, putting new properties in a company whilst keeping the rest personally, reducing borrowings, and bringing family members into the business.

"All of these require very careful thought," remarked Mr Browne. "For many affected by the tax changes, doing nothing is not an option and seeking professional advice is essential to avoid costly mistakes," he added.