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Tax changes for landlords – past and future changes with next steps advice

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4th July 2023 5 min read
Thursday 22nd June marked another increase in UK interest rates. With the new rate at a 15-year high of 5%, many landlords are questioning whether it is time to exit the buy-to-let market. We outline the key tax changes for landlords that have come into force in recent years and advise on next steps for the future.

As interest rates continue to climb, concerns over the future of the buy-to-let market are rising too. Buy-to-let properties have historically been viewed as an effective way to increase your income, however the long-term profitability of this form of investment is now an ongoing topic of debate.

Since December 2021, the Bank of England has announced 13 increases to interest rates, each one causing hikes in mortgage payments. For buy-to-let landlords, this has meant higher costs and lower profit margins as a result.

But soaring interest rates are just one factor in a series of economic changes that have had a negative impact on the profitability of the UK’s buy-to-let market in recent years.

From tax relief amendments to the introduction of new legislation, what exactly has changed for landlords since 2016 and are further changes on the horizon?

Timeline of key legislation and tax changes for landlords

April 2016 – Replacement of Domestic Items Relief supersedes Wear and Tear Allowance

Prior to April 2016, the Wear and Tear Allowance allowed you to claim an annual tax deduction of 10% on your rental income from furnished properties regardless of whether you spent the money or not.

The Replacement of Domestic Items Relief was introduced to replace the Wear and Tear Allowance and came into force on 6th April 2016. Both landlords of furnished and unfurnished rental properties are eligible to claim the new relief, however you are only permitted to claim the actual costs of replacing furnishings rather than the previous 10% tax credit.

April 2017 – Changes to tax relief for residential landlords (Section 24 restriction)

The first changes to tax relief on mortgage interest came into effect in 2017. Before April 2017, you could deduct interest on your mortgage payments from your rental income. If you were a higher rate taxpayer, this would have meant 40% tax relief on your mortgage interest.

The government decided to phase out this form of tax relief over a four-year period, while simultaneously introducing a new tax credit to replace it. Tax credits came into full effect in April 2020 and only permitted landlords to receive 20% basic rate tax relief directly on mortgage interest payments.

The Section 24 restriction left many landlords with higher tax bills to pay.

April 2020 – Amendments to Private Residence and Lettings Relief

Private Residence Relief provides you with an exemption from Capital Gains Tax (CGT) when you sell your home. Although this relief does not typically apply to the sale of buy-to-let properties, you could still claim it if the property you are selling served as your home for a period of time.

Before April 2020, you could claim Private Residence Relief for the period of time you used the property as your home and also for the final 18 months of owning the property (even if you rented out the property during those 18 months).

Stricter conditions surrounding the relief were introduced in April 2020, with the 18-month final period exemption halved to 9 months.

Lettings Relief was an additional relief that could be claimed in addition to Private Residence Relief to reduce your CGT liability. Changes made in April 2020 have effectively abolished this relief.

2025 – EPC changes

From 2025, all rental properties will be required by law to have an energy rating of Band C or above. If you have a property portfolio, this change could mean significant costs on rental upgrades to increase energy ratings.

It is crucial that you begin preparing for these changes and the associated costs as soon as possible. Failure to comply with the new energy rate requirements will result in large fines.

The UK Government is planning to introduce the ECO4 scheme to support landlords with the costs of these EPC regulation changes. You may also be eligible to apply for an EPC exemption. We strongly advise consulting a private client specialist for advice on grants and exemptions – contact us for more information.

Coming soon – Abolition of no-fault evictions

The Renters’ (Reform) Bill is in the process of going through Parliament and could be passed into law as soon as next year. If the bill is successful, no-fault evictions in the UK will be abolished and more power will be given to the tenant. A number of other changes surrounding tenant evictions would also come into force.

If the bill passes into law, it will be considerably more difficult for a landlord to evict a tenant without a sufficient reason for eviction.

Next step options for landlords

If you are a buy-to-let landlord, you may feel like you have reached a crossroads and are not sure which way to turn. There is a range of options for you to explore before making a final decision on your future:

  • Plan for a partial exit. If you have a property portfolio, you could opt to sell properties with low energy ratings to avoid renovation costs. This move would also generate cash flow and cover the costs of your remaining properties. It is important to take into account how CGT will impact this decision.
  • Plan for a full exit. You may decide the best course of action is to sell your properties and leave the buy-to-let market for good. As with a partial exit, you need to consider the effects of CGT.
  • Transfer ownership of your properties. If you have a spouse, transferring ownership of some or all of the properties could be an option worth exploring.
  • Incorporation. Have you considered incorporating your property portfolio to create a company? A company is currently able to obtain full tax relief on mortgage interest payments and therefore this option could provide income tax efficiencies.
  • Increase your overall tax efficiency. Make sure you are claiming all the tax reliefs you are entitled to and getting the most out of the tax allowances available to you.

Making the right move for your personal circumstances is vital – one wrong decision could have costly consequences for your property portfolio and financial future.

For more tailored advice on how you should navigate tax changes for landlords, contact us today to talk to one of our private client experts.