Buy-to-let changes will push 440,000 landlords into higher tax bracket

440,000 basic rate paying buy-to-let landlords will be pushed into a higher tax bracket under new regulations, according to research from the National Landlords Association (NLA).

The study found that limiting tax relief on buy-to-let income would push 22% of landlords surveyed into a higher tax bracket, with many facing the prospect of increasing rents or selling properties to cover the shortfall.

From April 2017, landlords will no longer be able to offset their mortgage interest against income tax. The benefit is set to be replaced by a 20% tax credit. Rather than paying tax on profits, by 2020, buy-to-let landlords will be required to pay tax on rental revenue.

Landlords with a secondary source of income are most likely to be pushed into a higher tax bracket as a result of these changes.

Here’s an example based on a basic rate taxpayer with a property that’s rented out for £15,000 per year on an interest-only mortgage that costs £10,800 per year:

• Current system: taxable rental income = £4,200 (with mortgage interest deducted)
• New system: taxable rental income = £15,000

With an annual salary of £35,000 from an alternative source, the landlord’s total income would be deemed to be:

• Current system: total income = £39,200 (basic rate)
• New system: taxable rental income = £50,000 (higher rate)

Richard Lambert, chief executive of the NLA, responded by calling on the government to only apply this regulatory change to buy-to-let loans approved after April 2017.

Call on the friendly 3 Wise Bears team to help guide you through the recent buy-to-let changes.