Published: March 1st, 2019 in Budget/Finance News
Landlords have been paying a lot more in taxes in the past 2-3 years than ever before. Landlords are now government targets – sacrificial lambs sent to the slaughter by politicians desperate to appeal to appease dispossessed millennials. There is a lot wrong with the housing market in the country and a lot of people have the right to feel really pee’d off at the situation but we’re not here to discuss that in this article.
What this article is about is to explain why the continuing changes to the way that buy-to-let investments are taxed and where landlords stand on the eve of the new 2019/2020 tax year.
What is buy to let mortgage interest tax relief?
Until April 2016, landlords could deduct 100% of their mortgage interest from their profits to reduce their tax bill.
Now, the government is three-quarters of the way through reducing the amount of mortgage interest that landlords can claim relief on. It’s coming down by 25% each year until the 2020/2021 tax year when the relief will completely disappear. And in return? Landlords will receive a 20% tax credit instead.
Let’s look at how this scenario for basic, higher, and additional rate taxpayers using a property attracting £10,000 a year rental, £3,750 a year of mortgage interest payments, and £2,000 worth of costs.
For basic rate tax payers…
20% taxpayer
YR 16/17
YR 17/18
YR 18/19
YR 19/20
YR 20/21
Rental Income
£10,000
£10,000
£10,000
£10,000
£10,000
Mortgage
£3,750
£3,750
£3,750
£3,750
£3,750
Costs
£2,000
£2,000
£2,000
£2,000
£2,000
Reduction in mortgage interest allowance
£0
-£938
-£1,875
-£2,813
-£3,750
Taxable Income
£4,250
£5,188
£6,125
£7,063
£8,000
Tax at 20%
£850
£1,038
£1,225
£1,413
£1,600
Mortgage Relief Due
£0
£188
£375
£563
£750
Tax Due
£850
£850
£850
£850
£850
For higher rate taxpayers….
40% taxpayer
YR 16/17
YR 17/18
YR 18/19
YR 19/20
YR 20/21
Rental Income
£10,000
£10,000
£10,000
£10,000
£10,000
Mortgage
£3,750
£3,750
£3,750
£3,750
£3,750
Costs
£2,000
£2,000
£2,000
£2,000
£2,000
Reduction in mortgage interest allowance
£0
-£938
-£1,875
-£2,813
-£3,750
Taxable Income
£4,250
£5,188
£6,125
£7,063
£8,000
Tax at 40%
£1,700
£2,075
£2,450
£2,825
£3,200
Mortgage Relief Due
£0
£188
£375
£563
£750
Tax Due
£1,700
£1,888
£2,075
£2,263
£2,450
For additional rate taxpayers…
45% taxpayer
YR 16/17
YR 17/18
YR 18/19
YR 19/20
YR 20/21
Rental Income
£10,000
£10,000
£10,000
£10,000
£10,000
Mortgage
£3,750
£3,750
£3,750
£3,750
£3,750
Costs
£2,000
£2,000
£2,000
£2,000
£2,000
Reduction in mortgage interest allowance
£0
-£938
-£1,875
-£2,813
-£3,750
Taxable Income
£4,250
£5,188
£6,125
£7,063
£8,000
Tax at 40%
£1,913
£2,334
£2,756
£3,178
£3,600
Mortgage Relief Due
£0
£188
£375
£563
£750
Tax Due
£1,700
£2,147
£2,381
£2,616
£2,850
If you’re a basic rate taxpayer, the new system won’t make any difference to you unless your rental income pushes you into the higher rate tax band.
If your mortgage interest payments are more than 75% of the rent you receive as a higher rate taxpayer, your profit will be zero after 2020. The equivalent rate for additional rate taxpayers is 68%.
How can you prepare for the relief cuts?
It is inevitable that many landlords will deal with these relief cuts by increasing the cost of rent for their tenants. However, this may jeopardise their tenancies entirely. Instead, there are a few things that you can do to soften the blow of this new regulation.
You could start by taking out shorter term fixed-rate mortgages. These mortgages usually come with a lower rate of interest, however, they do carry more risk. Thus, you will often be required to provide more in terms of security for the loan.
Alternatively, you could make your business a private limited company. This means that your profits will be taxed at the corporation tax rate, which is lower than the income tax rate for many landlords. The small downside to this is that fewer providers will be willing to lend you money, as they do not tend to lend to companies. The big downside to this is that you may be clobbered with gigantic stamp duty bills (and potentially capital gains tax bills) depending on the values of the properties within your portfolio.
Finally, if your spouse is in a lower tax band than you, you could transfer the properties to them. Take care to ensure that this does not place them in a higher tax band as a result. Again, there may be severe stamp duty and capital gains tax implications to this approach.
We can help
With anything property-related, it’s best to get your TFMC accountant to run through the numbers first. Get in touch with our team on 0800 470 4820 or email info@tfmcentre.co.uk.
