Buy-to-let tax relief is undergoing changes and will be phased in from 2017. This new system will increase your costs as a landlord if you own property in your own name, in partnership, or in a trust. If you’re a high rate tax payer – or if these changes push you into a high rate band – you will find yourself being affected by these changes.
Who is Affected
These tax relief changes apply to you if you are:
- A UK resident and you let properties either in the UK or overseas
- A non-UK resident and you let properties in the UK
- An individual letting properties in a partnership,
- A trustee or a beneficiary of trust liable for Income Tax on the property profits
What it Entails
Restrictions on finance costs will include interest on loans (including loans attributed to buying furnishings), overdrafts, and mortgages. Alternative finance returns such as discounts, premiums, and disguised interest, and other incidental costs for repaying or attaining mortgages and loans are also affected.
The tax reduction is currently set at 20% and is calculated using the basic rate value of the lower finance costs, property profits and of the adjusted total income.
Lower finance costs are costs that aren’t deducted from any rental income in that tax year and are in addition to finance costs brought forward. Property profits are regarded as the profits of the property business in the tax year, after using any brought forward losses. Finally, adjusted total income is the income exceeding your personal allowance, after both losses and reliefs and excluding any savings and dividends income.
Between 6th April of 2017 and 6th April of 2020, these changes will be slowly phased in:
- From 2017 to 2018, 75% of finance costs will be deductible from rental income and 25% basic rate tax reduction
- From 2018 to 2019, 50% of finance costs will be deductible from rental income and 50% basic rate tax reduction
- From 2019 to 2020, 25% of finance costs will be deductible from rental income and 75% basic rate tax reduction
- From 2020 to 2021, 0% of finance costs will be deductible from rental income and 100% basic rate tax reduction
What This Could Mean for You as a Residential Property Landlord
These changes mean that if you’re a basic rate tax payer, you may find yourself being pushed into a higher rate band. In a higher rate band, you will pay more in tax due to the tax relief on mortgage interest being limited to the corresponding level of a basic rate tax payer.
If you make small net profit, you may be in danger of experiencing negative cash flow after tax. Those who will be most impacted will be present higher rate tax payers, 40% and 45%, a landlord with strong rental cover, any tax payers that will be moved to a higher rate band with these changes, and landlords with high mortgage costs in relation to rental income. If you fall in the lower rate tax payer band or if you’re an unencumbered landlord, you won’t be affected.
As expert financial advisers, here at Burton & Fisher we are happy to help you clearly understand what the new changes in tax relief mean for you as a residential landlord. If you want to speak with one of our financial advisers, you can get in touch with us on 01524 416872. Our highly trained team always ensures you receive the best possible service!