If you are a buy-to-let owner, a dartboard sporting George Osborne’s face might be high on your Christmas wish list. And if it isn’t, you are probably one of the hundreds of thousands of small landlords still unaware of how they will be hit by a tax change introduced by the former chancellor.

Vanessa Warwick, a landlord and co-founder of the Propertytribes.com forum, calls that new rule “the biggest threat the private rented sector has ever had to face”; Mark Alexander, also a landlord and the founder of Property118.com, has moved to Malta as a tax exile because of the change.

It spurred Chris Cooper, who built up a buy-to-let (BTL) retirement nest egg to supplement his £34,000 income as cabin crew on an airline, into launching the Axe the Tenant Tax campaign and suing the government with help from Cherie Blair. The court rejected their application for a judicial review in October. And last month’s autumn statement not only dashed hopes of a reprieve but increased some landlords’ costs by banning letting fees for tenants.

The object of all this ire is the innocuous-sounding Section 24: from 2020, you will no longer be able to deduct mortgage interest payments as a business cost before working out a taxable profit. Instead, relief will be applied at 20% once you’ve arrived at your profit. It will be phased in over four years, and while it might not sound bad, Warwick insists it is. Those who own three or fewer properties — that’s 97% of Britain’s 2m landlords — do not even have this on their radar, she says. “The lack of awareness is alarming. They will only become aware of the changes when they put on their 2017 tax return. By then, it will be too late.”

“Where in the drafting of Section 24 did they intend to cause situations like mine?” asks Phil McKuhen, 46, who has cerebral palsy and became an accidental landlord when he struggled to sell his house in Liverpool 15 years ago. He has built up a portfolio of 17 buy-to-lets in the area, several of which are let long-term to disabled tenants, and earns £23,000 a year from them. But if he has to pay tax on his £53,000 of mortgage interest payments, he fears “not only bankruptcy but the prospect of having to evict other disabled people from their homes”.

So how bad is it? Property Partner, a crowd investment platform, has crunched the numbers for two typical BTLs with 75% interest-only mortgages. One is in outer London, bought for £425,000 and let at £1,480 a month: a classic option for long-term price growth. The other, in Manchester, cost £152,000 and brings in £700 a month: a buy aimed more at rental income. Here’s what could happen by 2020, when Section 24 takes full effect.

• A higher rate (40%) taxpayer will make almost no money on the London property: only £91 a year, a fall of about £2,000. In Manchester, the blow is less severe, but profit will fall by nearly half, to £960.
• For an owner on the top 45% tax rate, it looks far worse. Instead of pocketing £1,900 from the London flat, he or she will have to pay more than it earns, ending up £575 a year in the red. “The landlords worst affected are the ones with most properties,” Alexander says.
• A basic-rate (20%) taxpayer will pay no extra tax on the property income, but “taxable profit” could be higher because they can’t deduct the interest. Lumped on top of other income, it can push them up one, or even two, tax brackets — meaning they could lose child benefit, tax credits and allowances. This will affect 22% of landlords, or 440,000 people, according to the National Landlords Association.

So, will you be affected? Work out your property’s gross yield: divide the annual rent by the price you paid for it and turn the answer into a percentage. Then compare it to Property Partner’s rule of thumb — to break even by 2020, a higher-rate taxpayer with a 75% BTL mortgage will need a gross yield of 4.1%. For a top-rate taxpayer, it’s 4.5%.

“Things have got tougher,” says Dan Gandesha, who founded Property Partner — where about 9,000 people have invested more than £40m in 280 BTLs — after letting his former home in Reading, Berkshire. “The mood music feels concerning.” Yet he thinks the new chancellor’s acknowledgement that Britain needs homes for sale and rent “is the reason to believe that substantive changes are over”. Before the changes start to bite, here are five ways to ensure you’ll still make money from buy-to-let.

Set up a company
There is one loophole in the new tax rule: it does not apply to businesses. So, should you move your rental property into one? To do this, you’d have to “sell” to your new company at market rate. Not only would you incur capital gains tax on the increase in value of the property, your company would have to cough up the 3% of extra stamp duty levied on second homes. Ouch.

“Investors with existing portfolios should calculate what the effect will be,” says Rob Dix, author of The Complete Guide to Property Investment. “I’ve seen a lot of people rush into incorporating as a knee-jerk reaction and take a big hit — even though the income-tax increase would have been minimal in their situation.

“For new purchases, buying in a limited company is likely to be worth considering for anyone who’s likely to exceed the basic rate band,” Dix says. “Mortgage availability is improving, so it’s not as painful as it might seem.” It is tax-efficient to let returns build up in the company for a pension pot, say, or to fund your next property purchase.

Want an income? If you lend the deposit money to your company as a director’s loan, you can withdraw it tax-free, says Graham Davidson, managing director of Sequre Property Investment. “That’s just the company paying your loan back to you.” Or, from just £10, you can use platforms such as propertypartner.co, propertymoose. co.uk and thehousecrowd.com to buy shares in a company that owns a specific property.

Cut costs and raise rents
“I’d then look at improving profitability as much as possible to offset the extra tax burden,” Dix says. Jason and Lyn McClean, in their mid-forties, have increased rents and sacked letting agents across their seven small buy-to-let houses — mostly near their home in Thrapston, Northamptonshire. “You have to make every pound count now,” Jason says. “I have also put on hold any plans to buy more property, as it no longer makes sense. I set this up as an alternative to a pension. Why am I being penalised to high heaven for being a responsible citizen?”

It may help to remortgage at a lower BTL interest rate before tighter lending rules kick in next month, thereby reducing repayments. But putting up rents could cause your property to sit empty. “Raising profits will increase taxable income and could be self-defeating,” says Jon Cooper, tax director at CooperFaure accountants, so get expert advice.

Add value
Refurbishing could “reduce taxable profits while increasing capital values”, Dix says. You can deduct any works that restore the property’s condition — such as painting, replacing windows or even updating a bathroom or kitchen — from your rental income. But improvements such as an extension won’t count: you can only offset these from your capital gains tax bill when you sell. You can carry forward losses from a big refurb over several years until they are “wiped out” by profits, or offset them against profits on other properties: your tax liability is calculated across your whole portfolio.

Sell… and buy?
Offload properties now if they are not performing. Since the new tax rules were announced a year ago, full-time landlords Angela and David Bryant, 56 and 57, have sold about 20 of their 100 BTLs near their home in Horsham, West Sussex, and moved another eight into limited companies. This has reduced their debt from 75% to about 50% of their portfolio. Without that, their tax bill would have risen by almost £100,000 to £257,500 by 2020. “I don’t expect people to have sympathy for us, but it’s the tenants who ultimately suffer,” Angela says. The couple supply homes to private tenants on housing benefit, who are shunned by many landlords.

Others sell up and reinvest knowing the new rules of the game. At the height of the boom before the financial crisis, prices rose so fast that some investors didn’t even bother putting tenants in their properties. But the tax rules are making it difficult to gamble on growth alone, which has led investors to shift north in search of high yields. Still, BTL sales have dropped by almost two-thirds year on year, according to data from Haart estate agency, which has more than 100 branches, mostly in the south.

“There has been a sea change,” says Davidson, whose Manchester-based firm sources about 1,000 BTLs a year. At investment shows three years ago, people would ask him: “What do you have in London?” Now it’s: “What do you have outside London?”

Davidson looks for yields of 6.5% or above, in urban areas with good transport, near jobs. “It must be something tenants want,” he says. “Don’t go too low.” A £60,000 terrace in Grimsby may offer a 10% gross yield, but it will be “hard to let”. His top picks are Manchester, Leeds, Liverpool, Nottingham and Sheffield.

Analysis by Property Partner, taking into account the new rules and assuming a 2.5% rise in interest rates, shows Manchester as the place to future-proof your portfolio, with an average annual profit of about £5,400 by 2020. It’s followed by Cardiff, Durham, Leeds and Loughborough.

The top 20 safe havens are dominated by the north and the Midlands, while the 20 worst loss-makers are in the south and east, led by Cambridge (-£4,000) and Winchester (-£3,700). In London, you’d be best off in cheaper areas such as Barking and Dagenham (£2,200) and Newham (£1,400). Worst of all is pricy Kensington and Chelsea (-£13,400).

Restructure your finances
You may not have to resort to selling or setting up a company to pay less tax. “Review your circumstances in depth,” says Michael Wright, director of the tax advisers Rita 4 Rent. If you are married, transfer the greater share of the property to the lower earner with HMRC’s form 17, which does not incur stamp duty. You can also donate to charity or increase pension contributions to delay the point where you start paying the 40% higher rate of tax.

Think about your goals and map the best route towards them, Wright adds. “While tax is important, it should not be the sole consideration.”

Other obstacles for landlords

• Letting agents can only charge landlords, not tenants, under a fee ban that is likely to take effect in 2018.

• From January, lenders must carry out stricter stress tests on buy-to-let applications. Your rent must be 125% of the mortgage payment, worked out at a higher interest rate of 5.5%.

• From 2018, proposed rules would require private landlords to file a tax return every quarter, not every year.

• Buy-to-let purchases attract an additional 3% stamp duty tariff.

THE BEST
Once new tax rules bite in 2020, if interest rates rise by 2.5%, these places are set to yield gross annual profits of:

Nationwide
1 Manchester £5,439
2 Cardiff £3,940
3 Durham £3,928
4 Leeds £3,819
5 Loughborough £2,963
6 Bournemouth £2,882
7 Chelmsford £2,803
8 Nottingham £2,777
9 Oxford £2,733
10 Newcastle £2,656

London (excluding City)
1 Barking & Dagenham £2,231
2 Newham £1,427
3 Merton £621
4 Tower Hamlets £575
5 Havering £151

THE WORST
Nationwide
1 Cambridge -£3,988
2 Winchester -£3,683
3 Falmouth -£3,488
4 Salisbury -£3,127
5 Chichester -£2,749

London
1 Kensington & Chelsea -£13,368
2 Hammersmith & Fulham -£7,392
3 Haringey -£4,700
4 Islington -£4,348
5 Richmond -£3,623

Source: Property Partner, based on Zoopla average asking prices and rents

Martina Lees is co-author of The Accidental Landlord: The Keys to Letting Out Your Own Property with Complete Peace of Mind

This article was published in The Sunday Times Home on 11 December 2016