New tax changes could cause problems for expat landlords

The major change is the gradual reduction, and eventual elimination, of mortgage tax relief.

Before April 2017, landlords owning UK properties could deduct mortgage interest and other allowable expenses from their rental income before working out their tax liability. However, this year saw the first of three cuts in mortgage interest relief, seeing it go from 100% to 75%. This will fall again to 50% next year, and then 25% in 2019, and finally to 0% in 2020. Instead of mortgage interest relief, landlords will be granted a reduction worth up to 20% of the mortgage interest cost once their income tax on property profits and any other income sources have been assessed.

In short, this new system will lead to much higher tax bills for many landlords letting out UK properties.

It’s easy for someone living overseas to fall out of the loop and not be aware of these changes, but it’s crucial for any expat renting out a property in the UK to keep up to date with the amount of tax they’re required to pay on rental profits. Failure to declare rental profits could leave you facing a penalty from HMRC.

Now, licensing schemes, which require landlords to share their names and property addresses with HMRC, have been introduced in several areas across the UK to help crack down on those who avoid paying the right amount of tax. In just one London Borough – Newham, which has 27,000 registered landlords – HMRC found that 13,000 had not registered to pay tax on their rental profits, potentially costing the country up to £200 million.

The new rules regarding mortgage tax relief were initially announced by George Osbourne in the 2015 Summer Budget to make the tax system fairer, but some feel it puts retirees in a difficult position. One group concerned about the impact on pensioners is the National Landlord Association (NLA), who feel the new system could lead to significant shortfalls on retirement incomes.

CEO of the NLA, Richard Lambert, spoke of the trouble the tax changes could mean for many expats, many of whom are reliant on letting out property to fund their retirement years. Lambert warned that the new regime could “substantially” cut down the income expats receive from such investments, possibly going as far as to “compromise the retirement plans of a significant number of hard-working people”.

Lambert went on to suggest ways to help improve the situation. The NLA is now calling on the government to reduce the Capital Gains Tax landlords pay when selling their property if they’ve owned it for a long time. “A capital gains relief like we propose would provide an incentive to sell, allowing people to sell poorly performing properties and potentially purchase an annuity or invest in more liquid, lower risk assets to fund their retirement instead,” Lambert said.

What could the tax changes mean for you?

Renting out buy-to-let properties is one of the most common ways for expats to earn extra income, which is why it’s important you understand the changes and make sufficient preparations for any potential knock-on effect on your finances.

Of course, everyone is in a different situation when it comes to managing their wealth. For instance, if a landlord is living in Grand Cayman, their wealth management plans will likely be affected by the new rules in vastly different ways when compared with a landlord still in the UK.

That’s why, if you are concerned about how the new tax rules may affect you and your particular situation, it’s important to seek advice from an expert financial adviser. Blacktower’s independent financial advisers are situated in some of the most popular expat locations across the globe, and we want to help you make the most of your money.