Changes have been made to the way we can now operate buy to let mortgages. Since the 2015 Budget, tax relief available for interest has been substantially reduced. The new rules which were introduced in April 2017 mean that there has been a change in the way income is calculated.
Until April 2017, tax was payable on one’s net rental income after deducting allowable expenses such as mortgage interest. This meant that 40% tax-rate landlords could claim tax relief at their highest rate.
With the new changes being brought in over the next few years, from April 2020 tax relief can only be reclaimed at the basic rate (20%), despite the rate of tax the landlord pays. This change will slowly be phased in between now and 2020. The gradual shift in mortgage interest allowance is 0% in 2016-17, 25% in 2017-18, 50% in 2018-19, 75% in 2019-20, 100% in 2020 onwards.
While the move mainly affects those who already pay higher-rate income tax, it will push some basic-rate taxpayers into the higher-rate bracket once their rental income has been taken into account. The increase in taxable income might also affect claims for Child Benefit and Income Tax Credits. Higher-rate taxpayers can no longer offset all their mortgage interest against rental income before calculating the tax due.
This change does not apply to those who own property through a limited company and as a result, it may prove beneficial to speak to us at Fairview Financial about looking into changing the ownership although this is also a conversation to have with an accountant too. Companies will also pay corporation tax at a fixed rate irrespective of the size of the profits although it must be noted that corporation tax rate is currently at 20% reducing to 17% in 2020. Please contact Fairview Financial to take a look at the alternative mortgage options available.
Disclaimer: Most Buy to Let mortgages are not regulated by the Financial Conduct Authority.