What Are The Changes To Buy-To-Let Relief?
Due to the chancellor’s decision in the 2015 Summer Budget to cut mortgage interest tax relief, future landlords could struggle to make a profit on their homes that are buy-to-let.
As it stands, when landlords calculate their profits, they can offset the cost of the mortgage interest from the rental income. Meaning that if a landlord collects a rental income of £10,000 a year, but then pays mortgage interest of £9,000, the difference between the two, so £1,000 in this case, is the profit.
According to landlord’s income tax band, landlords tend to pay tax on their profits. If you’re not understanding this, here’s an example. If a taxpayer pays a basic rate of 20% tax on £1,000 would keep £800. So, it’s pretty simple.
This way will not be continuing for very much longer. George Osborne announced in his summer budget that landlords would no longer be able to deduct all their mortgage interest when they work out their profits.
Between 2017 and 2020, mortgage interest tax relief will steadily cut back to 20%. So, lets go back to our previous example landlord. If they had £10,000 of rental income and £9,000 of mortgage interest to pay, they will soon have to pay tax of the full amount, with a 20% credit on the mortgage interest.
For a higher rate tax payer, it’s even more! It would soon be working out at £4,000 (40% of £10,000) then minus £1,800 (20% of £9,000 interest). This equals to £2,200 up from £400 under the current tax regime. Meaning that landlords could be facing a massive increase of £1,800.
What Effects Does This Have On Your Profits?
If your mortgage interest is 75% of your rental home, meaning you’re a higher-rate taxpayer, the new tax could totally wipe you out! Smith and Williamson, the accountant, say that the threshold for additional-rate is when mortgage interest reaches a rental income of 68%.
If you are a basic-rate taxpayer, the tax liability is unchanged. Nevertheless, a basic-rate tax payer could be pushed into a higher tax band due to the new profit calculation.
Does This Affect Limited Companies?
No, limited companies are not affected by the new change to mortgage interest tax relief.
Therefore, many landlords have decided to set up company’s to try minimise the impact of the new tax regime. HMRC will however treat any transfer of ownership of a property as a sale. Meaning that capital gains tax bill’s might need to be paid. Also, because lenders offer a restricted choice of home loans to companies, the mortgage options might be limited.
If you would like to contact us regarding buy-to-let then you are more than welcome to contact us. We’ll look forward to hearing for you!