Almost half of landlords are planning changes as a result of tax changes in the UK introduced in the last 18 months, a new survey shows.

Changes they are considering include increasing rents, selling properties to reduce their portfolio and even giving up their business altogether while others are considering switching from a letting agent to self-management to save money.

Some 44% say the need to adapt to the changes which include a stamp duty surcharge on additional homes, the abolition of wear and tear tax break and the phasing out of buy to let mortgage tax relief, according to the poll from tenancy deposit scheme mydeposits.

The firm points out that full effects of the changes are unlikely to be felt for another three years as landlords can now only offset 75% of their mortgage interest against their profits which is due to fall to 50% in 2018, 25% in 2019 and to zero by 2020 when it will be replaced by a 20% tax credit.

Private landlords are a diverse group but according to mydeposits, the vast majority are individuals who own one or two properties and use buy to let as a part time income supplement rather than a full time business.

This means they are less likely to keep tabs on legislative changes and the survey found that 26% of respondents were indeed unaware of changes affecting mortgage interest tax relief and a further 23% did not know about the additional 3% stamp duty payable on second home purchases.

Some 86% of those who took part own between one and four properties, with a further 8% having between five and 10 properties. While 21% of landlords said the changes will not affect their buy to let business, 25% indicated they will need to increase rents to tenants.

A further 10% plan to sell up altogether, and 9% said they will switch from using a managed service through a letting agent to self-managing in order to reduce outgoings. While nearly 50% of landlords said they have no intention of leaving the private rented sector, nearly 25% plan to sell up in the next five years.

Although growing numbers of landlords with several properties are now setting up limited companies to sidestep the new rules, this is unlikely to be viable for smaller landlords, some of whom it would appear will be forced to increase rents or sell up.

According to Tony Gimple, director of Less Tax for Landlords, landlords have four options: sell up, do nothing, set up a limited company or move to a hybrid owning structure.

He doesn’t think setting up as a limited company is the best move due to remortgage costs and lending inflexibility and seven layers of taxation in companies including inheritance tax problems. He describes holding property in a hybrid structure as truly running a portfolio as a property business, whilst at the same time reducing tax leakage to the legal minimum.

‘Landlords should be running their buy to let portfolio as a business regardless of tax changes, and those forced out of the market will be the ones who are too highly geared with too little yield. Many landlords are trying to do everything themselves and often following unreliable or out of context information, whereas once they are professionally educated on what their options are, many choose to remain landlords and go on to prosper,’ he said.

The survey results shows that there will be change in the sector in the short to medium term, according to Eddie Hooker, chief executive officer of Hamilton Fraser, parent company to mydeposits.

‘Around 25% of those who responded were unaware of the changes to the tax regime on their existing portfolios which shows that more is needed to be done to help educate the market and help prepare landlords for the changes to their personal tax liabilities over the next few years,’ he said.

‘Even more poignant however, is the suggestion that more than 50% of landlords are considering changing their behaviour to safeguard their income by either increasing rents, turning to self-management or even selling up completely,’ he pointed out.

‘With all the well-meaning efforts that are being made in the market to make the whole renting experience a better place for both landlords and tenants, there is now a clear danger that supply could be restricted with the knock on effects this may cause. The right tax planning advice and income protection strategies are absolutely crucial,’ he added.

Source: Property Wire