As the saying goes, ‘Nothing is as certain as death and taxes,’ and just the merest mention of the word ‘tax’ is enough to make most people’s eyes glaze over.
If tax is so inevitable and dull, then why worry about it, right?
Wrong! Depending on the economy, different UK governments have different attitudes about whether or not to encourage buy to let investing and therefore they adjust their policies accordingly.
Without getting political about it, the previous Conservative government announced a cut in tax relief on mortgage interest payments and if you’re thinking about becoming a landlord, you need to know about it.
WHO is affected?
The first point to note is that this change only affects landlords who own property or properties in their own name. If you own, or are thinking about owning property via a business or company, then the new rules don’t apply to you.
WHAT exactly are the new rules?
You probably already know that you are taxed on most of the income that you earn from various sources. Rental income is no different. However, prior to these new rules, you would have been allowed to offset (deduct) mortgage interest payments and any other related costs from your rental income, before working out how much tax you owe – your tax liability.
However the amount of mortgage interest payments that landlords can offset against rental income is gradually being reduced.
Instead, all landlords will be given a flat 20% mortgage tax credit to reduce their tax bill a little. This means that you’ll pay tax on buy to let income at your standard rate (20% or 40% if you are a higher earner) but your bill will be reduced by a fifth thanks to the credit.
It sounds generous but the total amount that is taxable is a lot higher than it was before the changes came in, so many landlords may find that their rental properties aren’t making them as much profit than they were previously. Some landlords may also find that because their total income is now higher (due to mortgage interest payments no longer being deductible from rental income), they may be forced into a higher tax bracket altogether – not good news.
WHY has this been introduced?
It’s not really for us to comment on why each government introduces changes to the Buy to Let rules. If you’re in this market, you will need to pay attention on the day of the Budget (held in the Autumn), where the Chancellor announces these sort of changes, as there is very little way of telling when they may come.
WHERE does this matter?
This is an easy one: the rules apply to buy to let investors across the whole of the UK.
WHEN is the deadline?
The new rules were first introduced in April 2017 and will take three years to roll out fully. During 2017-2018, 75% of mortgage interest can be deducted from rental income before calculating tax liability and then 50% in 2018-19, 25% in 2019-20 and 0% in 2020-21.
Forethought is foresight
Don’t be put off by these new rules – they were originally announced in 2015 so that all current buy to let investors had chance to make the necessary adjustment to their finances.
That’s a whole five years ahead to get used to the idea.
If you are considering becoming a landlord for the first time now, you are perhaps less likely to be affected than current landlords because you can now factor these changes into your calculations before you purchase any property.
Renting out a property is not the blank cheque that some people think it might be but it can be an extremely profitable venture as long as you plan for the potential costs and tax liabilities.
You are a buy to let mortgage tax relief dummy no longer!