Under the old regime, you would only pay income tax on your net rental income, or profits. In other words, you'd first deduct the interest from the mortgage on your rental property, as well as any other expenses incurred throughout the year.
With many buy to let landlords being on interest-only mortgages, this meant that in practice they could claim all of their mortgage repayments. For a landlord charging £950 per month rental income, and with mortgage interest payments of £600 per month, they earn rental income of £11,400 for the year and pay mortgage interest of £7,200, their taxable income is £4,200 (£11,400 - £7,200). A basic-rate taxpayer would pay £840 in tax, a higher-rate taxpayer would pay £1,680 in tax.
Since April 2017, the system has changed, and by April 2020, you won't be able to deduct all of your mortgage expenses from rental income to reduce your tax bill.
Instead, landlords will be given a new tax credit, which is less generous than the current regime.
The government has decided to phase in the new mortgage interest rules over a four year period (which started in April 2017). You'll see the amount of mortgage interest tax relief steadily falling each year. Many basic rate taxpayers will see that they become higher rate tax payers as their total income is calculated using gross rental income (less operating expense but crucially not mortgage. The table below shows how this will impact on a higher-rate taxpaying landlord receiving £950 rent a month and paying £600 towards their mortgage on an interest only basis. interest).
These provisions do not apply to companies and therefore new buy to let properties could be purchased by a company to ease this additional burden. Existing landlords need to discuss the issue with their accountant who may be able to suggest a solution.
For more information on taxation issues, contact Gavin Roberts or any member of the team at Maxwells Chartered Accountants:
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