5 Tips to stay ahead of the new buy-to-let tax changes!.
With the introduction of new changes to the way tax is calculated for Buy to Let Investors, Sanjit Dhanjal, Managing Director of Opulent provides investors with five very useful tips to keep one step ahead and minimise the impact of the proposed changes.
In a bid to increase affordability for first-time buyers, Ex-Chancellor George Osborne in his 2015 Autumn budget made the announcement that two key changes would be made that would within the buy-to-let sector. The key change affecting most investors is the one below:
- A reduction to the tax relief on mortgage interest from 40 per cent for higher income earners to just 20 per cent, something that is to be phased in over 4 years from Apr 2017 until 2020
There’s no doubt the change is coming and there is no doubt that it is going to affect buy to let investors who have taken out finance to purchase their properties. But what can we do to reduce the impact of these changes? Below are Opulent’s 5 tips for investors:
First and foremost, I would urge investors and landlords to stay calm, particularly in the weeks running up to April where there will be even more scaremongering. The trick is to prepare yourself as early as possible and carry out a detailed analysis on each of your properties to take the best possible course of action as quickly as you can. It may be, particularly for landlords who purchased their properties a long time ago, that the changes do not mean you will be making a loss, but rather means that you will receive less profit. On the other hand, it may be that on some of your properties you could be making a loss. In this situation try to weigh up whether or not the profit on your profitable properties could offset some of the losses on your not so profitable properties. If they do, then there’s no real need to panic. If they don’t then you need to plan early and take the right course of action to put things right (see below).
Another thing I urge investors to do is to completely ignore what is going on around you and do your best to avoid reading the press! The press at times does often employ scaremongering tactics which in turn can pressure investors into making the wrong decisions. Depending on which day you choose to pick up the paper you can always hear conflicting advice and it’s important to bear in mind that in many cases the press have a hidden agenda in that more often than not, they are usually promoting some other type of investment e.g. stocks and shares. Ultimately only you can decide what course of action to take having analysed your portfolio. The person writing the article is using a generalist approach and knows nothing about your individual portfolio hence it always amazes me when I hear investors trying to follow out what somebody in the press has told them to do. In my opinion, it makes no sense whatsoever and I have seen investors make huge mistakes because of this.
Let’s face it, tax is complex, it’s difficult to understand and most the tie there will be solutions out there that neither you or I know about. For this reason, you should always make use of the resources around you and ask them for their assistance. An accountant or a tax advisor is someone you need to be speaking to. There are several companies out there who can assist including your accountant who should be doing your accounts anyway. There is a whole heap of ways landlords can minimise this tax some of which are explained in detail below so fear not there will always be something you can do. Another quick note on this is that most landlords myself included, often tend to favour lower costs wherever possible. In my experience, this is one area I would make an exception. I urge all landlords not to look to save costs when it comes to tax advice. The higher you pay, the better quality of advice you will receive will be. PwC, KPMG or any company who have a specialist tax division can always help and with their quality advice, you could save thousands!
Interest rates currently are at an all-tie low. All the illustrations above have been calculated using a fixed interest rate. Although interest rates are not likely to increase anytime soon, it is inevitable that one day they will. When they do increase, then there is every chance that higher income tax payers will be significantly affected by this. Understand the drivers behind what makes the interest rate fluctuate and be sure to be one step ahead so you can plan accordingly. I can imagine that many buy to let landlords will take their eye of this only realising when it’s too late. Study inflation and study the economy as it could once again save you huge amounts of money.
So you’ve managed to keep a level head, you’ve spoken to your tax advisor and tried your best to avoid the negativity surrounding this topic in the press. The next task becomes choosing the best course of action. Despite all the press around buy to let is dead and how landlords will be facing huge losses, there are some really good solutions out there that can help landlords reduce the impact of such changes. I know this because many of our investors have already benefited from them. Each option is different and will have their drawbacks, some of which will apply to you and some of which won’t. Be sure to discuss each of these options with your tax advisor and collectively decide which course, if any, is the best to take.
Keep your eyes peeled for our next blog which will go more in to detail about some of the things investors are doing to keep ahead of the imminent tax changes.