Buy-to-let landlords to feel brunt of tax relief changes
Following the announcement in the 2015 Summer Budget, tax relief on finance costs for buy-to-let landlords is set to be restricted to the basic rate of income tax.
Until now, all debt interest could be offset against rental income, so if a landlord earned £1,000 per month in rent, but the mortgage interest was £400 per month, he or she would only have to declare a profit of £600 (minus all the other expenses of running the property).
Under the new structure, income tax must be calculated without factoring in any interest, and then a basic rate ‘tax reduction’ can be applied.
HMRC has provided a detailed timetable for this transition:
- 2017/18: Deduct 75% of finance costs from rental income with a basic rate tax reduction of 25%
- 2018/19: Deduct 50% of finance costs from rental income with a basic rate tax reduction of 50%
- 2019/20: Deduct 25% of finance costs from rental income with a basic rate tax reduction of 75%
- 2020/21: Deduct 0% of finance costs from rental income with a basic rate tax reduction of 100%
The changes will force both basic and higher-rate taxpayers who purchase buy-to-let properties with a mortgage to pay more tax. This could push some buy-to-let landlords into loss, making it a financially non-viable investment unless they drastically increase the rent.
Call on 3 Wise Bears, and utilise online accounting software such as Xero to help you prepare for the changes to buy-to-let income tax.
