buy-to-let tax relief
Written by Nick Moulds on 21st February 2019 in Finance General Tax

Is tax relief being cancelled for buy-to-let mortgage interest? To put it simply, no. A reduction, not the cancellation, of tax relief is being applied.

Who does it apply to? 

It applies to those who:

  • let residential property in the UK or elsewhere, and
  • are claiming a deduction for financing costs, and
  • from April 2017, pay income tax on their property income at the higher (40%) or additional (45%) rate.

As such, it will not apply to:

  • financing costs for the purchase of furnished holiday let or commercial property, 
  • property businesses subject to corporation tax – owned by companies, or
  • individuals who pay tax on their property income at basic rate only.

As mentioned in the previous post, as of 6th April 2020, landlords affected will no longer be able to deduct their finance costs from their property income. Alternatively, they will receive a basic rate deduction from their income tax liability.

When will this affect me?

The schedule for this deduction is as follows:

  • 2017 – 2018: The deduction of allowable finance costs will be restricted to 75%, with 25% being available as a basic rate income tax deduction.
  • 2018 – 2019: The deduction of allowable finance costs will be restricted to 50%, with 50% being available as a basic rate income tax deduction.
  • 2019 – 2020: The deduction of allowable finance costs will be restricted to 25%, with 75% being available as a basic rate income tax deduction.

What are the consequences of this?

A significant consequence of this change is that the rental income for tax purposes increases but the rent itself does not, thus the financial costs are added back. With that in mind, it’s possible that basic rate taxpayers may find themselves suddenly in the higher rate taxpayer bracket.

How would this happen?

To see just how much of a difference this could make, let’s take a look at an example income from 2016/17 and then recalculate this for when all the changes have come into effect. 

2016/17: 

Income from rent 125,000
Deductions for mortgage interest 85,000
Deduction of personal allowance 11,000
Income tax due at basic rate of 20% (29,000 x 20%) 5,800
Total pre-tax income 40,000
Less tax due 5,800
Total after-tax income £34,200

Now let’s use the same figures again but disallowing that initial deduction of mortgage interest and simply apply the base rate taxes.

2016/17 – version 2:

Income from rent 125,000
Deduction of personal allowance (reduced due to income exceeding threshold) 1,000
Taxable income remaining 124,000
Income tax due at basic rate of 20% (32,000 x 20%) 6,400
Income tax due at higher rate of 40% (92,000 x 40%) 36,800
Less basic rate tax credit for mortgage payments (85,000 x 20%) -17,000
Total tax due 26,200
Total after-tax income £13,800

What this means overall: 

As you can see above, with no change in your business situation at all, the new rules will see a reduction in your post-tax income of £20,400! Depending on your personal situation this may mean that you must quickly pay off loans or even sell property. 

How we can help – Although your situation may not be as drastic as that illustrated above, it is still vital that landlords begin to consider their options as soon as possible. At Moulds & Co Accountants we understand the need to fully understand your finances and the time restraints in effect. There is still time to respond and adjust to these changes. To hear how the Moulds & Co team can help, call 01937 584188 today.

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