BTL changes were announced in the Summer Budget of 2015. From 6th April 2017 the amount of Income Tax relief landlords could get on residential property finance costs was restricted to the basic rate of tax.
According to recent figures this means that more than 8 million people in England alone will be affected.
The changes will:
- affect you if you let residential properties as an individual, or in a partnership or trust.
- affect how you receive relief for interest and other finance costs.
Finance costs includes mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. No relief will be available for capital repayments of a mortgage or loan.
Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their property profits. They will instead receive a basic rate reduction from their income tax liability for their finance costs.
Landlords will be able to obtain relief as follows:
- 2017 to 2018, the deduction from property income is currently restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction.
- 2018 to 2019, 50% finance costs deduction and 50% given as a basic rate tax reduction.
- 2019 to 2020, 25% finance costs deduction and 75% given as a basic rate tax reduction.
- 2020 to 2021, all financing costs incurred by a landlord will be given as a basic rate tax reduction.
Who is affected?
Landlords with high loan to value rental portfolios will be the most affected.
Landlords with buy to let mortgages in the 40%-45% tax brackets will pay more tax.
Those in the 20% bracket may pay more if their gross income (rental and other income) is greater than £45k. This in turn could affect child tax credits you receive and student loan repayments.
So, for example, let’s say we have a Lincoln landlord, a high rate tax payer who has a BTL investment where the rent is £950 a month and the mortgage is £650 per month. In the tax year 2016/17, assuming no other costs or allowable items.
- Annual rental income £11,400.
- Taxable rental income would be £3,600 after tax relief from mortgage relief.
- Meaning they would pay £1,440 in income tax on the rental income.
Assuming no other changes, the landlord would have income tax liability’s as follows:
- 2017/18 Tax year – £1,830
- 2018/19 Tax year – £2,200
- 2019/20 Tax year – £2,610
- 2020/21 Tax year – £3,000
Landlords who are higher rate tax-payers are going to have be a lot smarter with their BTL investments and ensure they are maximising their rental properties full rental capability.
What are your thoughts on the currently active BTL tax changes? Feel free to comment below…