Landlords confused about recent tax changes

A new survey has revealed a worrying lack of awareness of recent changes to mortgage interest tax relief – which were phased in at the beginning of this month and affect most UK landlords.

Previously, UK landlords would pay tax on profits at their highest rate of Income Tax. However, between April 2017 and 2020, this system is gradually being replaced.

Under the new system, the amount of Income Tax relief landlords are entitled to on the financing costs of residential property is now restricted to the basic 20 per cent rate of tax, as of April 2017.

Furthermore, landlords must now pay tax based on turnover, rather than based on the difference between rental income and mortgage interest, as they would have done previously.

However, a study carried out by online letting agent Upad has found that one in five UK landlords are unaware of these dramatic changes.

It also found that almost half (47 per cent) of landlords have no idea how much more tax they will be paying by 2020, when the new system takes full effect.

James Davis, CEO and founder of Upad, said: “Higher tax will mean lower profits for many landlords, which is why some are warning that rents will have to rise this year.

“However, rent rises are likely to be deeply unpopular with tenants so landlords will need to think about adding some cost-effective, tax deductible improvements to their properties that justify asking for an increase.

“For instance, by providing complimentary Wi-Fi, upgrading the appliances or giving the kitchen or bathroom a makeover.”

The new tax changes are likely to hit landlords who pay 40 or 45 per cent tax the hardest. However, some basic-rate taxpayers could be pushed into a higher tax bracket as a result of the new rules.