In recent years the Government has announced various measures targeted at Landlords, including a stamp duty land tax surcharge and the removal of a percentage tax break for wear and tear. One of the Government’s next policies to take effect will be the removal of buy-to-let tax relief.
To ensure that you are in the best position ahead of the changes we have summarised some of the key points that you should be aware of.
The current position is that income tax is due on rental profits. This means that for the time being Landlords are entitled to deduct their mortgage interest payments and other finance related costs from the rental income before calculating their tax bill. These provisions currently provide Landlords with incremental relief dependent on their tax bracket, i.e. 20% for basic rate tax payers, 40% for higher rate tax payers and 45% for top-rate tax payers. However, this will soon change.
At midnight on 5th April 2017 the Government will begin the phased introduction of restricting buy-to-let tax relief.
Following the full implementation of the Government’s policy, Landlords can expect changes, including:
- To no longer be able to deduct finance related costs and so income tax may be payable on the full rental income; and
- Tax relief will no longer be on an incremental basis; instead Landlords may be entitled to a tax credit at a flat rate of 20% irrespective of their tax bracket.
These changes are crucial for all Landlords with mortgages over buy-to-let properties, as they may push Landlord’s into a new income tax bracket.
All is not lost however, as these changes may not affect a buy-to-let property which is let by a corporate entity.
As either a current or prospective Landlord, it is important that you consider these imminent changes and how they may affect you. We would strongly recommend that you review your property portfolio with ourselves and your accountant to ensure that you are in the best position to face these upcoming changes.
This article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax advice. We recommend that you should consult your own tax and accounting advisors before engaging in any transaction following 5th April 2017. We are always happy to work with your tax and accounting team to find the most appropriate route forward for you.