The Challenges for Buy-to-Let Landlords in 2017 and How to Cope

As a buy-to-let landlord in 2017, it can feel as if the decks are becoming stacked against you. April 2016 saw the introduction of a 3% stamp duty surcharge on second home purchases which swiftly followed plans to slash tax relief. So what does the loss of tax relief mean? How could it hit your profits and, most importantly, what can you do about it?

As a buy-to-let landlord in 2017, it can feel as if the decks are becoming stacked against you.

April 2016 saw the introduction of a 3% stamp duty surcharge on second home purchases which swiftly followed plans to slash tax relief.

Strike three has been the Autumn Statement plans to outlaw Letting Agent Fees for tenants, which inevitably means that administrational tenancy costs will need to be relayed to landlords. Although this is not expected to be made law until next year and not applicable to Wales (it is almost certain that the Welsh Government will follow suit), there is much to consider for you and your property portfolio.

So what does the loss of tax relief mean? How could it hit your profits and, most importantly, what can you do about it?

Up until April 2017, people buying to let will have been able to claim tax relief on their mortgage interest payments at their marginal rate of tax. This means that a basic rate taxpayer would receive 20 per cent tax relief. Those on a higher rate would receive 40 per cent relief and top-rate taxpayers could claim 45 per cent.

As changes are phased in from April 2017, tax relief will be a flat rate of 20 per cent. Landlords who pay basic rate tax would see no change, but those on higher incomes will find themselves losing a substantial amount more in mortgage interest payments.

The Nationwide Building Society has given an indication of how severe the impact could be. In published estimated figures of how a typical landlord’s profits might be hit, a landlord with a £150,000 buy-to-let mortgage on a property worth £200,000, with a monthly rent of £800, would currently have a net profit of around £2,160 a year. However, under the new system, the net profit would plunge to £960.

Ultimately, the higher the interest you pay, the more you would feel the squeeze, so if you have a long-term fixed rate you may find your profits aren’t much better than the returns from a savings account. Add to this the increased stamp duty charge and the burden on the buy-to-let landlord is even greater.

As with many of these things, the answer is to remain positive and pro-active. There are a few options available:

1.You could switch to shorter-term fixed rate deals to receive lower rates of interest, although these mortgages can carry more risk.
2.You could place your property portfolio in a limited company structure. You would then pay corporation tax (which is lower) rather than income tax on your profits. A drawback is that your mortgage options will narrow as fewer providers will lend to a company.
3.If your spouse pays a lower rate of tax, you could transfer ownership of one or more properties to them (taking care this does not lift them into a higher tax band).

There is always a silver lining as these changes do level the playing field somewhat. If you’re a landlord with a lower income, you’re no longer at such a disadvantage. Also, this is good news for the new wave of Silver Landlords, those hoping to use their pension pots to buy rental property.

Already, Bay Estate & Letting Agents have experienced a hugely busy January 2017 with buy-to-let investors returning to the market place and looking to make cash investments, perhaps to offset the tax implications due in April. This could be a sign of things to come.

For more information and advice on this subject and to help you build and secure your property portfolio, talk to a Bay Estate & Letting Agents property manager and they'll be happy to help.