Imminent changes to tax relief for residential landlords: In Brief

Wed 08 Mar 2017

As of the 6th April 2017, landlords will no longer be able to deduct mortgage interest costs from their rental income when calculating taxable profit. They will instead be taxed on their total rental income, and receive tax relief on mortgage interest payments – however this relief will be reduced in stages, to 20%, by 2020.

Currently

As an example a landlord that receives £10,000 in annual rental income with mortgage interest costs of £8,000 will be taxed on the £2,000 profit. The taxable amount depends on whether you’re a basic, higher or additional rate taxpayer. So a higher rate (40%) taxpayer will pay £800.

From April 2020

Using the same scenario as above, the landlord will be taxed £4,000 (40% of £10k), and receive 20% relief on the mortgage interest of £8,000 – which would be £1,600. If you then deduct this from the £4,000 tax bill, it will leave a final bill of £2,400. This is THREE TIMES what it is now.

It is important to note that these changes are being phased in over the next 4 years (see chart below), however for those landlords with mortgages, it will ultimately mean larger tax bills and therefore reduced profits.

Tax year

Percentage of finance costs deductible from rental income

Percentage of basic rate tax reduction

2017 to 2018

75%

25%

2018 to 2019

50%

50%

2019 to 2020

25%

75%

2020 to 2021

0%

100%

 

The goverment believes these changes will discourage property investors from purchasing homes that could otherwise be snapped up by first time buyers. This, on top of the additional hike in stamp duty for second home owners, is a further blow to buy-to-let investors that rely on borrowing to fund their ventures.

For this group of property investors, the importance of attractive mortgage rates has never been clearer.

For a full rundown of these changes, and how they may affect you personally, you can visit https://www.gov.uk/government/news/changes-to-tax-relief-for-residential-landlords

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