Get the latest News direct to your inbox

How the proposed buy-to-let tax changes could affect you

By Andrew Ellinas LL.B.Wednesday, 23 September 2015

The surprise tax change unveiled in George Osbourne's summer Budget on 8th July will affect many buy-to-let investors. The tax increase is proposed to be phased in from 2017 and fully implemented by 2020.

All higher-rate taxpayers who own buy‑to‑let properties on which there is a large mortgage will pay substantially more tax. Some current basic-rate taxpayers will also be hit, because the change will push them into the higher-rate tax bracket.

At the heart of the change is a landlords’ future inability to deduct the cost of their mortgage interest from their rental income.

In other words, tax will be applied to the rent received – rather than what is left of the rent after the mortgage interest has been paid.

Here is a worked example assuming you, the landlord, pay 40pc tax.

 

NOW
Your buy-to-let earns £20,000 a year and the interest-only mortgage costs £13,000 a year. Tax is due on the difference or profit. So you pay tax on £7,000, meaning £2,800 for HMRC and £4,200 for you.

2020
Tax is now due on your full rental income of £20,000, less a tax credit equivalent to basic-rate tax on the interest. So you pay 40pc tax on £20,000 (ie £8,000), less the 20pc credit (20pc of £13,000 = £2,600), meaning £5,400 for HMRC and £1,600 for you. Your tax bill has therefore gone up by 93pc.
Now, say the Bank Rate – and in turn your mortgage rate – rises by a small fraction, lifting your mortgage cost to £15,000, while your rent remains at £20,000.
You will have to pay £5,000 tax in this scenario, so you make no profit at all.

 Over 30,000 people have signed a petition at https://petition.parliament.uk/petitions/104880 urging the government to reverse the planned tax relief restriction on ‘individual’ landlords. At 100,000 signatures, the petition will be considered for debate in Parliament.

Get the latest Properties direct to your inbox

How much is my property Worth?