Landlords – Mortgage Interest & Tax

Landlords – Mortgage Interest & Tax

Steve Brown
18th May 2016

One of the biggest changes that landlords really need to start planning for right now is the withdrawal of the interest element of a mortgage being offset against your tax.

This change will come into effect in April 2017 so we have a year from now to start planning. When it starts in April 2017 it will be introduced in 25% incremental steps so that in 2020 there will be zero tax relief for the interest part of the mortgage.

Most certainly higher rate tax payers need to get accountant and tax advice now as there are certain instances where a landlord may be in a position they may be paying more tax than they receive in rental income! Which is a very scary prospect.

Lower rate tax payers seriously need to be looking at their 5 year plan as it could be pushing lower rate tax payers into the higher rate band.

Again they will be paying more tax than what they were expecting to be paying and cash flow is absolutely critical and making sure you can pay your tax.

But more importantly, if you are being hit with larger tax bills, are you going to have enough money left over for your maintenance and your regular safety inspections?

So our advice is please get professional tax advice now to ensure you don’t have any shocks in the future.

George Osborne unveiled a shock tax change in 2015 which will remove landlords’ ability to deduct the cost of their mortgage interest from their rental income when they calculate a profit on which to pay tax.

In effect, the Chancellor wants to tax landlords on their turnover rather than profit, meaning that tax will be payable on non-existent income. For some, tax rates will exceed 100pc: landlords will have to pay all of their profit in tax, and then pay more tax still. The tax increase will be phased in from 2017 and fully implemented by 2020.

Compare buy to let mortgages across the market

Smith & Williamson has calculated that any higher-rate taxpayer landlord whose mortgage interest is 75pc or more of their rental income, net of other expenses, will see all of their returns wiped out by 2020. So mortgage costs above 75pc of rental income will mean the buy‑to‑let investments become loss-making. For additional-rate (45pc) taxpayers, the threshold at which their investment returns are wiped out by the tax is when mortgage costs reach 68pc of rental income.

Some current basic-rate taxpayers will also be hit, because the change will push them into the higher-rate tax bracket. Very wealthy landlords who do not need mortgages will be untouched.

Telegraph Money has developed a buy-to-let tax calculator that gives an indication of how your profits will be affected by the new tax over the next five years.

Original Source & Calculator

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