Jun 6, 2017

With the ever constant tax changes for landlords to be aware of, it is not uncommon to find that many landlords are still unaware of the most recent April 2017 changes, which can have serious implications on landlord incomes and profits.

It is now more expensive to own since the loss of the 10% wear and tear allowance. Now that the tax relief on mortgage interest is being phased out, the benefits of having debt are diminishing. With many now calling this the end of the buy-to-let era, the number of BTL borrowers fell from 29,100 in March 2016 to a mere 4,200 the following month when new 3% stamp duty charges were introduced and have struggled to pick up since, according to figures from the Council of Mortgage Lenders.

As of the 6th of April 2017, changes have been implemented to the tax relief for finance costs, and by April 2020, this will be restricted to the basic rate for income tax, which is currently set at 20%. This relief will be provided as a reduction in the level of tax liability, as opposed to a reduction in the taxable rental income, and this may also have an impact on landlords.

The changes come into place over a four-year period, starting this year. So for the 2017/18 financial year, the process starts with the split standing at 75% of finance costs which can be deducted from rental income and 25% of basic rate tax reduction. The split will be increased by 25% each year until in 2020/21, the system will be 100% of basic tax reduction.

For a landlord who is currently in the basic rate of tax band, and maintains that position after the changes, there will be no change to their circumstances. However, landlords who are in the 40% or 45% tax bracket, the changes will impact on their net profit from their buy-to-let activities.

In essence, to make the tax system more fair the turnover rather than the profits will be taxed, meaning landlords with high incomes will no longer enjoy the generous tax treatments they previously were entitled to.  But there are other changes they need to be aware of too, including the loss of wear-and-tear relief, which means that landlords can now claim only actual costs spent on repairs, rather than a blanket 10pc reduction for wear and tear.

The gradual loss of tax relief on mortgage interest payments from now until 2020 will hit higher-rate and additional-rate taxpayers particularly hard.

If a higher-rate payer currently sees £10,000 income a year and has mortgage interest payments of £9,000, the resulting tax bill on the difference is £400. By 2020, that bill will rise to £2,200.

For those whose mortgage interest is 75% or more of their rental income (68% for additional rate payers), their profit will be wiped out. The loss in tax relief is also likely to push around 440,000 lower-rate taxpayers into a higher tax band, according to the National Landlords Association (NLA).