Landlord taxes are changing!
From the 6th of April 2017, some changes will take place in regard to how buy-to-let owners are taxed for the income gained on their properties. This will affect the tax reliefs that landlords of residential properties get for finance costs that will be restricted to the basic rate of Income Tax.
Currently, landlords can deduct allowable expenses (maintenance and repayment costs, insurance, water rates etc.) and their mortgage income from the taxable rental income.
From April there will be restrictions on how much of their mortgage payments they can deduct on the total amount and the new reductions will be applied gradually and phased out by 2020/2021.
A tax reduction equal to the basic rate of tax (currently 20%) will be then available and will lower of:
- Finance Costs: all the costs not deducted from rental income in the tax year plus any finance costs brought forward;
- Property Profits: after using any brought forward losses;
- Adjustment of the total income that exceeds the personal allowance after losses and reliefs, excluding savings, pensions, and dividend.
You can not use tax reduction to create a tax refund.
Will these changes affect me?
The changes will affect landlords with a mortgage falling into these categories:
- Any UK resident letting residential properties in the UK or overseas.
- Any non-UK resident letting properties in the UK and then taxable.
- Landlords letting residential properties in partnership with others.
- Trustees of a trust directly holding UK residential properties.
If you are a landlord offering furnished holidays accommodations or commercial properties. Then these changes don’t affect you.
CAN YOU GIVE AN EXAMPLE?
Of course! We’re here to help.
Let’s present you have a rental income of £2,000 per month and your mortgage interest payments are £1,500 per month. Currently, you will have to pay taxes on the £500 difference.
When these changes implement. Than you will pay taxes on the full rental income of £2,000 minus allowable expense you can claim as a tax reduction at a maximum of 20%.
If you work, then your salary will be added to the rental income and the amount of taxes you pay might increase, pushing landlords to a higher tax bracket.
WHEN IS THIS HAPPENING?
The changes will be fully implemented in 2020 and the mortgage interest payment deductible from rental income will slowly change as follows:
- Tax year 2017-2018: 75%
- The tax year 2018-2019: 50%
- Tax year 2020-20121: 0%
- The tax year 2019-2020: 25%