Important Tax Changes For Buy-To-Let Landlords

Shaun Love Buy-to-Let, Mortgages, Tax

Buy-To-let Landlords are to be taxed differently from April.  Here are the main changes and how you should start planning for them now.

The two key changes that will impact upon this are:

  • Finance costs, including mortgage interest, are being phased out until that they can no longer be deducted in 2020/21 when calculating taxable income.
  • The amount of tax relief that you can claim on finance costs will be capped at the basic rate of tax, this is currently 20%, and will be given by a reduction to your tax liabilities.

Buy-To-Let Landlord Tax Example

If you have a rental income of £10,000 per year and pay mortgage interest of £8,000 per year producing a taxable income of £2,000. Under current rules, you pay tax on the £2,000 income. A higher rate tax payer (40%) would pay tax of £800 giving a net profit of £1,200.

Under the new rules, when the scheme has been completely phased in, you can expect to pay 40% of the rental income (£10,000/year) £4,000 minus the 20% tax relief from the mortgage interest (£8,000) which would be £1,600. In total, paying £2,400 giving a net loss of £400.

These changes will impact higher rate and additional rate tax payers most.

The changes are going to be phased in over the course of the next four years as outlined below:

Tax Year Percentage of finance costs that can be deducted from rental income Percentage of finance costs subject to basic rate tax deduction
2017-2018 75% 25%
2018-2019 50% 50%
2019-2020 25% 75%
2020-2021 0% 100%

 

You will pay tax and profits as shown in the table below during the transition:

 

2017-2018 2018-2019 2019-2020
Rental Income £10,000 £10,000 £10,000
Mortgage interest £8,000 £8,000 £8,000
% of interest relief 75% 50% 25%
Interest now taxable £2,000 £4,000 £6,000
Taxable profit (profit + interest now taxable) £4,000 £6,000 £8,000
Higher rate tax charge (40%) £1,600 £2,400 £3,200
20% tax credit of the taxable mortgage interest £400 £800 £1,200
Tax due (Tax charge – 20% tax credit) £1,200 £1,600 £2,000
Net profit £800 £400 £0

 

If you are a higher-rate taxpayer, the new tax will wipe out your returns if your mortgage interest is 75% or more of your rental income.

The threshold for additional-rate taxpayers is when mortgage interest reaches 68% of rental income, according to Smith & Williamson, the accountant.

The tax liability of a basic-rate taxpayer is unchanged. However, the new profit calculation could push a basic-rate taxpayer into a higher tax band.

If you are concerned about how this may impact you then you should seek support from your tax adviser.

 

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change. For details of the 2016/17 tax bands visit www.gov.uk.

The Financial Conduct Authority does not regulate taxation and trust advice.