BUY TO LET MORTGAGE – TAX CHANGES

BUY TO LET MORTGAGE – TAX CHANGES

Part of the announcements in this year’s Budget, was the proposal to restrict the amount of tax relief available to landlords who have mortgaged properties. The restrictions will be phased in over 5 years and will be complete by the tax year ended 5 April 2021

Tax year 2016/17

For furnished properties, Wear & Tear Allowance will be abolished, and landlords will only be able to claim actual expenditure on new or replacement items.

Tax year 2017/18

25% of the mortgage interest will be added back to the rental profit and the tax calculated according to the tax bracket the landlord falls into (either at Basic Rate – 20%, Higher Rate – 40% or Additional Rate – 45%). A deduction of 20% of the interest that has been disallowed will be taken from the tax payable (note 1).

Tax year 2018/19

50% of the mortgage interest will be added back to the rental profit and the tax calculated according to the tax bracket the landlord falls into (either at Basic Rate – 20%, Higher Rate – 40% or Additional Rate – 45%). A deduction of 20% of the interest that has been disallowed will be taken from the tax payable (note 1).

Tax year 2019/20

75% of the mortgage interest will be added back to the rental profit and the tax calculated according to the tax bracket the landlord falls into (either at Basic Rate – 20%, Higher Rate – 40% or Additional Rate – 45%). A deduction of 20% of the interest that has been disallowed will be taken from the tax payable (note 1).

Tax year 2020/21

100% of the mortgage interest will be added back to the rental profit and the tax calculated according to the tax bracket the landlord falls into (either at Basic Rate – 20%, Higher Rate – 40% or Additional Rate – 45%). A deduction of 20% of the interest that has been disallowed will be taken from the tax payable (note 1).

SO HOW WILL ALL THIS AFFECT ME?

All of the following examples are based on a landlord with rental income from furnished lets of £15,000. The mortgage interest is £3,000 per annum.

 

Basic rate landlord Tax year
2015/16 2016/17 2017/18 2018/19 2019/20 2020/21
    25% 50% 75% 100%
Rental income 15,000 15,000 15,000 15,000 15,000 15,000
Mortgage interest (3,000) (3,000) (3,000) (3,000) (3,000) (3,000)
Mortgage interest restriction 750 1,500 2,250 3,000
Wear & Tear allowance (1,500)
Total Profit on which tax is payable 10,500 12,000 12,750 13,500 14,250 15,000
Tax @ 20% 2,100 2,400 2,550 2,700 2,850 3,000
Tax deduction (20 % of disallowed interest) (150) (300) (450) (600)
Total tax payable 2,100 2,400 2,400 2,400 2,400 2,400

 

Additional cost for a basic rate landlord by 2021 is £300 per annum

 

Higher rate landlord Tax year
2015/16 2016/17 2017/18 2018/19 2019/20 2020/21
    25% 50% 75% 100%
Rental income 15,000 15,000 15,000 15,000 15,000 15,000
Mortgage interest (3,000) (3,000) (3,000) (3,000) (3,000) (3,000)
Mortgage interest restriction 750 1,500 2,250 3,000
Wear & Tear allowance (1,500)
Total Profit on which tax is payable 10,500 12,000 12,750 13,500 14,250 15,000
Tax @ 40% 4,200 4,800 5,100 5,400 5,700 6,000
Tax deduction (20 % of disallowed interest) (150) (300) (450) (600)
Total tax payable 4,200 4,800 4,950 5,100 5,250 5,400

 

Additional cost for a higher rate landlord by 2021 is £1,200 per annum

 

Additional rate landlord Tax year
2015/16 2016/17 2017/18 2018/19 2019/20 2020/21
    25% 50% 75% 100%
Rental income 15,000 15,000 15,000 15,000 15,000 15,000
Mortgage interest (3,000) (3,000) (3,000) (3,000) (3,000) (3,000)
Mortgage interest restriction 750 1,500 2,250 3,000
Wear & Tear allowance (1,500)
Total Profit on which tax is payable 10,500 12,000 12,750 13,500 14,250 15,000
Tax @ 45% 4,725 5,400 5,738 6,075 6,413 6,750
Tax deduction (20 % of disallowed interest) (150) (300) (450) (600)
Total tax payable 4,725 5,400 5,588 5,775 5,963 6,150

 

Additional cost for an additional rate landlord by 2021 is £1,425 per annum

 

Note 1

The 20% deduction will be based on the lower of

  • The mortgage interest disallowed
  • The total property profits in the year
  • The total income (excluding savings and dividends) exceeding the personal allowance

Disclaimer: Articles are accurate at the time of posting but may be affected by legislative changes and individual circumstances.  Please always contact us for personalised advise and assistance.

2015-07-20T12:37:28+01:00