Tax changes to buy-to-let: how will it affect Landlords?
27th October 2015
In the first all-Conservative budget since 1997, the Chancellor, George Osborne, announced in the summer that the amount of tax relief that landlords will be able to claim on the interest of their mortgage payments will be reduced.
Whilst only for higher-rate tax payers, the changes mean that property investors who currently claim top rates of tax relief of 40% and 45% will only be able to claim relief in the future at the basic rate of tax, currently 20%.
Andrew Montlake discusses how this will affect landlords.
What is tax relief?
Tax relief is something that allows you to pay less tax so you can account for money you need to spend on things like expenses. It can also allow you to get tax repaid in other ways, such as straight into a personal pension.
As landlords, as your buy-to-let properties are classed as self-employed businesses, you are currently able to get tax relief and deduct some of your running costs from your taxable profit, so long as they are allowable expenses.
How will the tax rates change?
Under the new rules, landlords will not be able to deduct the cost of the interest on their mortgage from their rental income.
For example, currently, if your property earns £20,000 per year and the interest-only mortgage costs £13,000 per year, you will pay tax on the £7,000 profit. If you currently pay the higher 40% tax rate, this means you will pay £2,800 in tax per year.
Under the same circumstances in 2020, however, the full rental income of £20,000 will be taxable by 40%, if you fall under this tax bracket, meaning, after taking away the new basic-rate tax relief of 20% on your interest-only mortgage payment of £13,000 (20% of £13,000 = £2,600), you are left to pay £5,400 per year – an increase of 93%.
That sounds confusing. Will these changes be implemented over time to give landlords chance to adjust?
The withdrawal of the higher-rate reliefs will be phased in over a period of four years, in order to help landlords adjust to the lower relief level, and nothing will happen until April 2017.
It will then be implemented in four stages:
From April 6th 2017, the higher-rate tax relief can still be claimed on the first 75% of your mortgage interest costs. The remaining 25% will have the basic rate of tax relief applied.
From April 6th 2018, the amount of tax relief you can claim at the higher rates will drop to 50% of your mortgage interest costs. The remaining 50% will have the basic rate of tax relief applied.
From April 6th 2018, the higher-rate tax relief can only be applied to 25% of your mortgage interest costs. The remaining 75% will be at the basic rate.
From April 6th 2020, you will only be able to claim tax relief at the basic rate level.
If you have any furnished holiday lets, this restriction will not apply.
These changes will be published and are expected to be passed in the 2015 Summer Finance Bill in late October this year.
How can you assess the impact these changes will have on you?
There is still time for landlords to forward-plan so they do not have to suddenly increase rents.
For any landlords currently investing in property, or considering expanding their portfolio, it is wise to speak to an independent mortgage adviser to discuss these changes.
It is also worth talking to a property tax expert to see if there are any other tax breaks you could take advantage of.
For further information please contact us.
Your property may be repossessed if you do not keep up repayments on your mortgage.
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The fee is up to 1% but a typical fee is £495.
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Andrew Montlake, Director and Spokesperson for Coreco, gives his honest and forthright views on the mortgage market, economy and all things property related. Monty was voted "Mortgage Personality of the year 2008", "Best Press Spokesperson" in 2011 and is the current holder of the British Mortgage Awards “Best Marketeer” title. Expect expert analysis, delivered in a down to earth style with a side helping of exuberance.