In this article, Tram Abramov, CEO at TaxScouts, takes a closer look at what you need to know about new buy-to-let tax relief changes, as well as what you should be doing to protect your income.

In 2015, the government announced a new system for the way buy-to-let Income Tax relief is claimed, which took effect in 2017. But, recent research by Kent Reliance found that one in seven landlords weren’t fully aware of how to deal with these increasingly important changes.

This financial year, the new tax system ramps up, which could provide a nasty surprise for those who are unprepared. To help you avoid a financial headache, I’ve put together an overview of the new system, as well as some steps you should take to deal with it.

What are the buy-to-let Income Tax relief changes?

The new system will see a gradual reduction in the buy-to-let Income Tax relief on financial costs that you can claim. Under the new rules, you won’t be able to offset mortgage interest against your rental income. Instead, a less generous basic rate relief tax reduction of 20% will be introduced.

The changes are being phased in: they started in April 2017, when you could only offset 75% of mortgage interest against your profits. This year, that amount falls to 50%, then 25% in 2019, and finally 0% in 2020. HMRC have issued guidance on the changes that you should read for full details.

This new system effectively puts an end to the tax advantage landlords have enjoyed in the past, and many will see their bills increase significantly as a result. In addition, having to declare more income could potentially push you into a higher tax bracket altogether.

What should I do to deal with these changes?

If you haven’t already taken steps to adjust to this new system, you should explore your options, as it could help you to avoid problems further down the line as the phasing in progresses.

A common solution favoured by landlords has been incorporation, where you transfer ownership of your property to a limited company. In doing so, you will only need to pay Corporation Tax, and won’t be liable for Income Tax. Another option is to transfer property ownership to someone who is below the threshold for Income Tax, as they won’t be liable to pay it.

These are just two options, and there are quite a few others. The most important thing to remember is that you need to find the one that best suits your needs. Whatever plan of action you’re considering, I can’t stress how important it is to take financial advice before you implement it. A tax advisor will be able to review your situation and help you to choose the one that is the most efficient, ensuring that you don’t make the wrong decision and protecting your livelihood.

I hope this article has helped to shed some light on what is becoming a more pressing issue as each tax year goes by. By acting now and taking the right advice, you’ll be able to ensure your buy-to-let continues to be a worthwhile investment.

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Daniel Peacock

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