The impact of the new tax changes on buy to let landlords

05 Apr 2017

Firstly, let me advise that I am NOT a tax specialist but I thought it might be useful to remind our clients of the forthcoming changes which are coming into force as of this Friday.

These changes to the tax rules will affect all INDIVIDUAL landlords who currently offset the interest part of their mortgage against the rental income, which let’s face it, is probably about 75% of you! So unless you don’t have a mortgage on your buy to let investment or you haven’t been claiming, these changes will affect you! This also doesn’t affect limited companies.

Tax Changes for Buy to Let Landlords

It’s a piece of legislation called Section 24 and it DOES NOT ALLOW MORTGAGE INTEREST TO BE DEDUCTED FROM YOUR RENTAL INCOME.

So what happens is that the “profit” you make from renting out your property will look higher than it has done this year. The changes are being phased in over 4 years so the mortgage interest relief will reduce from 100% now, by 25%
Probably easiest to use an example …

CURRENT POSITION
You rent out a property generating £650 pcm.
Rental income is £650 * 12 = £7,800 per annum

You can then deduct your expenses so insurance and factoring £480
Repairs and legislative costs           £  700
Agent fees                                         £1,000
Mortgage interest                            £4,500
Total expenses                                 £6,680
Taxable profit                                   £1,120

Lets assume a basic rate taxpayer will therefore pay £224 in tax and a higher rate will pay £448 in tax
POSITION AFTER CHANGES (FRIDAY!)
In 2017/2018 you will be able to deduct 75%, with the remaining 25% available as basic rate reduction
2018/2019 deduct 50% and 50% basic rate
2019/2020 deduct 25% and 75% basic rate
2020/2021 no deduction and basic rate only SO everyone can claim a basic rate allowance for their finance cost ie 20% of their finance costs.

So by 2020…
You rent out a property generating £650 pcm.
Rental income is £650 * 12                                                                       £7,800 per annum
You can then deduct your expenses so insurance and factoring       £480
Repairs and legislative costs                                                                    £700
Agent fees                                                                                                   £1,000
Mortgage interest                                                                                       nil
Total expenses                                                                                          £2,180
Taxable profit                                                                                            £5,620

Lets assume a basic rate taxpayer will therefore pay £1124 in tax and a higher rate will pay £2248 in tax but then you need to claim the 20% basic rate deduction of the financing cost (£4500) so £900.

So the final figures following the changes would be , for the basic rate tax payer, £224 ( was £224 so no change) and for the higher rate tax payer £1348 (was £448 so an increase of £900).

So its not great for the higher rate taxpayer, but basic rate is hasn’t impacted on in terms of tax although please be aware that the “income” might impact on your tax rate banding.

How can you limit the impact if there is one on you?
Options might be to consider creating a limited company, transferring ownership to a spouse for example who is in a lower tax bracket, increase rent where possible, its vital to take proper professional advice.

Remember I am NOT a tax expert, just trying to offer some clarity into the changes!