Landlords! Are You Ready for the New Tax Rules?

You may have already heard of the new tax rules coming in this April. It may start slowly but by 2020 landlords will only be able to claim up to 20% tax relief on mortgage interest payments (instead of the current 100%). 

This is set to have a dramatic effect on landlords who are ‘highly geared’ i.e. have a high level of mortgage borrowing on their buy to let property.

So whereas before you could deduct all mortgage interest from rent received before calculating tax, from April 17, this will be reduced, in stages until 2020.

In short it means that if you currently make a net (i.e. after tax profit) of say £1800 a year which is common for a smaller Worthing or Lancing investment property, in the coming financial year, tax will take an additional £250 bite and by 2020, £1000 extra will be due to HMRC*.

For many landlords this will hit hard although those fortunate enough to own without a mortgage won’t see any difference.

Combined with recent changes to Stamp Duty which sees landlords pay an extra 3% on purchase it’s hardly surprising many investors are feeling hard done by.

However, the Treasury have said the change is not about hurting landlords, instead helping change the advantage buy-to-let landlords have over first time buyers (home ownership has dropped 2% last decade). After all, homeowners get no such tax relief and must pay their mortgage out of taxed income.

A Treasury spokeswoman has been quoted as saying "By restricting the mortgage relief available to landlords we have addressed the unfair advantage they enjoyed over others trying to buy a house and we do not expect there to be an effect on rents"

"Only one in five landlords are expected to pay more tax as a result of the reform and they will still enjoy generous tax reliefs to help with the upkeep of the properties they let."

So What Do We Think?

We’re worried for smaller, highly geared landlords who may be forced to evict a good tenant to sell the property. 

Will that mean owner-occupiers will then have the chance to buy? 

Well yes, but there’s a but! Larger cash-rich investors unaffected by the changes are already getting ready to buy up many of the properties that come to market so these rules may simply see the decline of the smaller, less wealthy landlord.

Like so many things, this policy may end up with far reaching and perhaps unforeseen consequences.

Mortgage interest and other allowable costs can be deducted before calculating taxable profit

Mortgage interest can’t be deducted before calculating taxable profit

Rental Income

£10,000

Rental Income

£10,000

Mortgage

£5,000

Costs

£2,000

Costs

£2,000

Taxable Income

£8,000

Taxable Income

£3,000

Tax @ 40%

£3,200

Tax Due

£1,200

Mortgage Interest Relief (20%)

£1,000

Buy to Let Profit

£1,800

Tax Due

£2,200

 

Buy to Let Profit

£800

*assumes 40% tax payer and liable to changes

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