Buy to Let: 6 tips for dealing with the tax changes

Buy to Let

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George Osborne’s first Budget since the election contained something of a bombshell for Buy to Let investors.

One of the attractions of Buy to Let investing is the ability for investors to offset mortgage interest against the income they receive. Opponents of the system have long since argued that it gives Buy to Let investors an unfair advantage against owner occupiers, especially first time buyers. On the other hand, Buy to Let investors argue all businesses can offset debt interest against turnover and it simply puts them on a level playing field with businesses which invest in property.

Mindful of the need to raise additional revenue, the Chancellor announced that over the course of the next few years the amount of interest Buy to Let investors will be able to offset against their income will be capped.

For many investors, particularly those with large mortgages or high levels of income from elsewhere, the change will severely dent, or even wipe out their profit.

So, if you are affected, what steps should you take? Here are six to consider.

#1: Calculate the effect of the changes

As a rule of thumb, higher earners, in excess of their Buy to Let income, and those with larger mortgages will be most affected.

But, before you take any action, take some time to calculate the true cost to you of the changes. Be warned, they are complex so you may want to take some professional advice.

Assuming you are affected, what steps should you consider taking?

#2: Try to reduce your expenditure

If you are faced with a large increase to your annual tax bill one option is to reduce your expenditure, although this will of course increase your profit which will also push up your tax bill.

We told you it was complicated!

Consider ways you could reduce your expenditure, for example could your letting agent’s fees be reduced? Could you manage the properties yourself? Could you reduce the cost of insurances? All of these things and more should be considered.

#3: Increase your rents

Property experts are divided as to whether landlords affected by the changes will increase rents, to help offset the effects of the new tax.

Most landlords will want to be fair to their tenants, whilst others will be restricted in any rent increases by local market forces.

As unpalatable as it may be, increasing the rent you charge is certainly an option.

#4: Sell up

This might seem like a drastic step, however the changes will mean that some Buy to Let investors see their profit margins completely wiped out. In fact, the worst case scenario for highly geared investors is that they make a loss but still end up with a tax bill.

Selling may therefore be the only option for some landlords.

Before you make any rash decisions we’d suggest you double check your figures, consider other options and importantly calculate the amount of Capital Gains Tax (CGT) you will be liable for on any profit you make.

#5: Consider ways to reduce your CGT liability

As a rule of thumb CGT is payable on he profit you make when you sell certain investments, including investment properties.

However, there are steps you can take to reduce the amount you pay.

For example, everyone has a CGT allowance, this is the amount of profit you can make in a tax-year before you start to pay tax; in the current, 2015/16 tax year it is £11,100.

It therefore makes sense to sell your property in years when you have not used your CGT allowance and stagger sales, over multiple tax years, if you have more than one property.

If you are married, and the property is held in the sole name of you or your partner, you could consider transferring part of the ownership to your spouse, which will double the CGT allowances you can offset against the profit made and further reduce the tax bill.

CGT is a specialist area and we would always recommend you take advice from a suitably qualified accountant or financial adviser.

#6: Roll over the gain to ‘reclaim’ tax

Despite taking the steps outlined above some Buy to Let investors will still be left with a CGT bill to pay.

One route, once the tax has been paid, is to ‘rollover’ the remaining capital into an investment which attracts tax-relief. There are a number of options to do this, including:

  • A pension
  • A Venture Capital Trust (VCT)
  • An Enterprise Investment Scheme (EIS)

All of these options carry a varying degree of risk, generally high in the case of a VCT or EIS, and the tax-relief always comes with strings attached. What’s more VCTs and EISs are only suited to a small minority of investors. However, we’d suggest you speak to an experienced Independent Financial Adviser to talk the options through, weigh up the pros and cons, and decide if it is the right choice for you.

We’re here to help

If you would like advice on how the changes affect you, we are here to help.

Call Sarah or Bev today on 0115 933 8433 or email

Please note:

The Financial Conduct Authority does not regulate Buy to Let mortgages or tax advice.

Tax relief is subject to individual circumstances and can change.