The buy-to-let market has been rocked by the new tax changes that are gradually being introduced from April 2017.
At the moment, the interest that a landlord pays on their buy-to-let mortgage is tax deductible, but under the new rules, that will eventually no longer be the case.
Mortgage interest allowance will be reduced gradually under the buy to let tax changes. Currently, 100% of the interest is tax deductible, but this allowance will be reduced by increasing amounts: by 25% in 2017-18, 50% in 2018-19, 75% in 2019-20, and finishing with a 100% reduction in 2020 and beyond.
Here is a simple table that helps to explain how the tax system will change over the coming years, based on a higher-rate (40%) taxpayer.
This is based on a property worth £400,000 and a rental yield of 5% (£20,000). The mortgage is assumed to be an 80% mortgage, at 4.5% interest (ie £14,400 annual interest).
To make it easy to compare the numbers, we have kept payments and interest at a constant throughout and have assumed interest is calculated annually.
Buy to let interest relief tax changes
As you can see, by the time the scheme comes fully into force, the tax payable has almost completely wiped out any profit (in 2020, the person in our example is left with an annual profit of £480). Additional tax deductible costs could be taken into account, and we have not done this here, but the margins are still being squeezed.
Note that there will still be a basic rate tax relief at 20%, which means the changes will not impact a lower-rate taxpayer directly, but they will affect total taxable income – so it could push a lower-rate tax payer into the 40% bracket.
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