Summary of changes
Individuals who own and rent out property are facing numerous changes to the way in which their income is taxed.
Any individual who receives rental income on residential property in the UK or elsewhere and incurs financial costs (such as mortgage interest) will be effected.
In the summer 2015 budget, the former chancellor announced that tax breaks for buy-to-let landlords would be curbed in order to “create a more level playing field between those buying a home to let and those buying a home to live in”.
At the moment, landlords can claim tax relief on their mortgage interest payments. In other words in order to calculate their profit they can offset any mortgage interest and/or charges against their rental income.
For example if the landlord collect £12,000 rent per annum and their mortgage interest for the year is £9,000 they will only make and be taxed on a profit of £3,000.
Reduction in available tax relief
From the next tax year (2017/18) this situation will no longer exist as landlords are no longer able to deduct all of their mortgage interest when calculating their profits. Instead the amount of tax landlords can reclaim as relief will be capped at the basic rate of tax over the course of a four year period beginning in 2017.
Landlords will no longer be able to deduct all of their finance costs from the property income to arrive at the taxable profit. They will instead receive a basic reduction from their income tax liability for their finance costs.
Landlords will be able to obtain relief as follow:
- In 2017 to 2018 the deduction from the property income will be restricted to 75% of the finance costs, with the remaining 25% being available as a basic rate tax reduction;
- In 2018 to 2019, 50% finance costs deduction and 50% given as basic rate tax reduction;
- In 2019 to 2020, 25% finance costs deduction and 75% given as basic rate tax reduction; and
- From 2020 to 2021 all financing costs incurred by a landlord will be given as basic rate tax reduction.
Effect on private landlords
If you are a higher rate tax payer, the new tax will wipe out any return you currently make on your rental property if your mortgage interest is 75% or more of your rental income.
The tax liability of basic rate tax payers remains unchanged. Although, the new profit calculation could potentially push a basic rate tax payer into the higher rate band.
Limited companies are not affected by the changes to financial cost tax relief. Many individuals are therefore setting up limited companies and transferring their property to this.
Please note though the transfer of the property from an individual to a limited company is seen as a sale and therefore the individual could receive a capital gain tax bill.
Mortgage options may also be limited as lenders as lenders options for mortgages are more restrictive for companies. Landlords have until April 2017 to consider their options.
Please contact us if you would like any further help and assistance in these property tax issues.