This article is an external press release originally published on the Landlord News website, which has now been migrated to the Just Landlords blog.
The Government’s proposed tax changes will affect every mortgaged landlord who pays 40% or 45% tax. They will pay much more under the plans.
Landlord Tax Changes Explained
Some basic-rate taxpayers will also pay higher tax, as the change will put them into the higher-rate bracket.
The only buy-to-let landlords that won’t be affected are the ones that bought properties in cash and don’t need a mortgage.
Under the changes, landlords will be unable to deduct the cost of their mortgage interest from their rental income. 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 an example assuming the landlord pays 40% tax.
Currently:
Your rental property earns £20,000 per year in rent and the interest-only mortgage costs £13,000 a year. Tax is due on the difference, or profit. You pay tax on £7,000, meaning £2,800 for HM Revenue & Customs (HMRC) and £4,200 for you.
By 2020:
Tax will be due on your full rental income of £20,000, less a tax credit equivalent to basic-rate tax on the interest. So you pay tax on £20,000 (£8,000), less the 20% credit (£2,600), meaning £5,400 to HMRC and £1,600 for your. The tax bill has now increased by 93%.
Additionally, if the base rate, and therefore your mortgage rate, rises even slightly, taking your mortgage cost to £15,000, you will pay £5,000 in tax – if rent stays the same – meaning you make no profit at all.
