Buying To Let – Tax Changes

By 26th May 2017TrustATrader Blog

Do you own a buy-to-let property? Budget changes in the last couple of years mean that you will receive lower levels of tax relief, and could end the days of profitability for private landlords.

You will not be affected by the changes if you rent out properties that you own outright. If, however, you have a buy-to-let mortgage or loans for your rental property, read on. At Trust A Trader, we know that some of our customers have invested in buy to let properties. We take a look at the changes, and how they could affect you.

Changes in tax relief

Until now, landlords with a buy-to-let mortgage have been able to deduct all of the costs relating to their property for tax purposes, including all finance costs, such as interest on mortgage and improvement loans and fees. This means that landlords only pay tax on the profit, so if they have an income of £20,000 and pay £10,000 finance costs, they will only have to pay tax on the £10,000 difference.

From April 2017, a new scheme is being phased in, which means you can’t deduct finance costs from your income, but you can claim tax relief on your finance costs at 20%, the basic tax rate. So, instead of taking your finance costs off your income, you will pay 20% tax on your finance costs and your normal tax rate on the rest of your income.

All taxpayers, regardless of their tax brackets, will receive 20% tax relief. This means that higher and additional rate taxpayers will definitely pay more tax – they will pay their normal tax rate, less 20%. Based on 20% tax relief on finance costs, basic rate taxpayers will not need to pay any more tax than they are already. However, they will need to change how they calculate their income.

Changing profit calculation

If you pay the basic rate tax, the amount of tax you need to pay will not increase, as you will have tax relief on all your finance costs. However, the changes mean that you will need to change how you work out your profit. You won’t be able to deduct finance costs from your profit, which will mean that, although you may earn the same as last year, your overall profit under the new calculation will be higher. Currently, based on the above calculation, if you earn £20,000 rental income and pay £10,000 finance costs, your income for that property is £10,000. By 2021, your income will be all of your rental income, including finance costs. This could put you into the next tax bracket, meaning you will need to pay more tax even though your income hasn’t risen.

The changes in how landlords calculate tax won’t be immediate; they will be phased in over the next four years. Keep an eye out for next week’s blog for more details on the yearly changes in tax calculations for landlords.