Buy to let tax relief changes: what you need to know
The 6th of April saw the government usher in some changes to how landlords will be taxed. The changes, which will affect landlords throughout the UK, are due to be phased in over a period of four years, giving landlords time to make adjustments and get ready for the new legislation. The full rate will be in action from 2020, but what exactly do the changes mean for you?
From April 2017
Up until the 6th of April, landlords will have been able to deduct both their mortgage interest payments and any allowable expenses from their rental income to calculate their profits. This has now changed; instead, landlords are only allowed to deduct their allowable expenses when calculating their profit from rental income. That means they are no longer able to include any mortgage interest payments, which in theory should make their profits seem larger and in turn would have made them liable to pay more tax on the profits.
The legislation, however, is aimed at making things simpler. Once the landlord has calculated their rental income profit, this is added to the income generated from their job to come up with their total annual income. This is the sum that the landlords will be taxed on but a new tax reduction for landlords is also being introduced. The government will provide a 20% reduction in tax to whatever is the lowest value out of the landlord’s mortgage interest payments, the rental income profit or the total annual income.
The changes will be phased in between now and 2020 in one-year periods. Between April 2017 and 2018, the mortgage interest payments that are deductible from the rental income will stand at 75%. This will drop to 50% between 2018 and 2019, then to 25% between 2019 and 2020, before finally hitting 0% in 2020. Conversely, the basic rate tax deduction that the changes apply to will grow in increments of 25% until it reaches 100% in April 2020.
How it will work
Currently, if you have a rental income of £2500 a month from properties that you purchased with buy to let finance, the mortgage interest payments stand at £1500 a month because you are only paying tax on the difference between the amounts, which equals £1000.
After all the changes come into play, however, you will be taxed on the full rental income of £2500 minus expenses and the 20% tax reduction. Unfortunately, this could force you into a higher tax bracket so it’s well worth looking at the changes thoroughly before deciding on a plan of action.
As a landlord, it’s important to know where you stand with the new tax changes. For more advice on letting in Cardiff, contact us at Thomas H Wood today www.thomashwood.co.uk
Back to our Blog