A survey of almost 1,000 experienced private landlords found that 25% have already sold, or are planning to sell, following the Government’s plans to remove their ability to deduct their mortgage interest costs from their rental income before calculating their tax bill.
The dramatic change was announced in the August 2015 budget and will start to take effect from next year.
Hardest-hit will be those property investors paying higher rates of tax (40% or 45%) and who have large mortgages. Instead of being able to deduct mortgage costs, landlords will have a 20% tax credit, which will leave many higher-rate taxpayers with squeezed profits and some falling into a loss after the change begins to be phased in in April. Lower-rate taxpayers may be pushed up a tax band, losing many of the associated benefits.
Landlords in buy-to-let companies are not affected, prompting many to consider incorporating.
The study, by the Residential Landlords’ Association, follows a previous survey which found that 56% of landlords will increase rents to cope with the tax changes.
Buy to let tax changes
1. From 2020, landlords will no longer be able to deduct the cost of their mortgage interest from their rental income when they calculate the tax due.
2. So tax will be paid on turnover rather than profit, meaning tax could be due on non-existent income.
3. For higher-rate taxpayers, mortgage costs above 75% of rental income will make their BTL investments loss-making.
4. Mortgage interest relief will be restricted to 20%, meaning that higher and additional-rate taxpayers will be particularly affected.