Home > What do the tax relief changes mean for landlords?

What do the tax relief changes mean for landlords?

From April 2017 the tax relief landlords have on the interest paid on mortgages is being phased out. Prior to this landlords have been able to deduct the interest paid on mortgages in the same way they would other allowable costs before tax was paid.

From 6th April 2020, tax relief will be restricted to the basic rate of income (20%) and will be given as a tax liability instead of a reduction to taxable rental income. This also means that those basic rate taxpayers could find that they are pushed into a higher tax band.

This means that those landlords who are already higher rate and additional rate taxpayers will inevitably end up paying more tax.

It’s likely that those landlords only making a small net amount could find themselves experiencing negative cash flow.

The table below demonstrates how the tax relief changes will be phased in from 2017:

Tax relief

2016/17

2017/18

2018/19

2019/20

2020/21

Previous system

100%

75%

50%

25%

-

New system

-

25%

50%

75%

100%

So what do the changes to tax relief mean to landlords?

Probably the most important thing is landlords need to remember they’re going to have to pay more in tax and that money has to be available when tax is due. That’s not going to be easy for every landlord, especially those on tight budgets making small incomes or who currently lose money on their rental property.

This is an example of how a 40% taxpayer could be impacted by the change in tax legislation:

 

16/17

17/18

18/19

19/20

New system (20/21)

Rental income

£8,000

£8,000

£8,000

£8,000

Rental Income

£8,000

Mortgage Interest

£5,000

£5,000

£5,000

£5,000

Costs

£500

Running Costs

£500

£500

£500

£500

Taxable Income

£7,500

Taxable income

£2,500

£5,000

£6,250

£6,250

Tax @ 40%

£3,000

Tax due (40%)

£1,000

£1,250

£1,500

£1,750

Mortgage Interest Relief (20%)

£1,000

Buy to Let profit

£1,500

£1,250

£1,000

£750

Tax Due

£2,000

         

Buy to Let profit

£500

Clearly from a healthy profit in 2016/2017 the buy to let landlord is going to make a small amount of profit in the new system. This reduced income could make it very difficult for many smaller landlords being able to continue offering rental property, or we may experience upward pressures on the rent landlords are forced to charge tenants.

To find good tenants fast, simply list with MakeUrMove


Related Posts

No results found.
MakeUrMove
Rated NAN/5 based on 0 reviews