Are you a landlord? Do you know how the changes to tax relief for mortgage interest will affect you?
With effect from 6th April 2017, new rules came into force regarding how tax is calculated on your property income profits. If you have a furnished holiday let or run your property business through a limited company, these rules won’t apply to you.
If you are an individual, residential landlord, you might want to put your fingers in your ears and shout la-la-la very loudly but I wouldn’t advise it.
In addition to the 3% Stamp Duty supplement for second properties, another way to ‘deter’ investors from becoming residential landlords is to increase the tax they will pay.
Whereas in the past you could deduct your mortgage interest (only the interest and not any capital repayments), there will now be a phased reduction in the interest that is “deductible”.
In 2017-18, 75% of the interest paid is deductible, moving to 50% in 2018-19, 25% in 2019-20 and absolutely zilch by the 2020-21 tax year. Instead landlords will receive relief for non-deductible finance charges** at a rate of 20% (i.e. the basic rate of tax). The impact on basic rate taxpayers is neutral but higher rate taxpayers will see the relief cut in half.
So, it could look something like this:
|75% deductible||50% deductible||25% deductible||0% deductible|
|Rental income||£ 28,800.00||£ 28,800.00||£ 28,800.00||£ 28,800.00|
|Agency fees||-£ 3,600.00||-£ 3,600.00||-£ 3,600.00||-£ 3,600.00|
|Insurance||-£ 960.00||-£ 960.00||-£ 960.00||-£ 960.00|
|Cleaner/gardener||-£ 2,400.00||-£ 2,400.00||-£ 2,400.00||-£ 2,400.00|
|Repairs and maintenance||-£ 1,200.00||-£ 1,200.00||-£ 1,200.00||-£ 1,200.00|
|Net income before interest||£ 20,640.00||£ 20,640.00||£ 20,640.00||£ 20,640.00|
|Mortgage interest||-£ 14,400.00||-£ 14,400.00||-£ 14,400.00||-£ 14,400.00|
|Deductible||-£ 10,800.00||-£ 7,200.00||-£ 3,600.00||£ –|
|Non-deductible||-£ 3,600.00||-£ 7,200.00||-£ 10,800.00||-£ 14,400.00|
|Taxable property income||£ 9,840.00||£ 13,440.00||£ 17,040.00||£ 20,640.00|
|Tax at 40%||£ 3,936.00||£ 5,376.00||£ 6,816.00||£ 8,256.00|
|Relief for non-deductible finance charges||-£ 720.00||-£ 1,440.00||-£ 2,160.00||-£ 2,880.00|
|Tax payable||£ 3,216.00||£ 3,936.00||£ 4,656.00||£ 5,376.00|
|Cash left||£ 3,024.00||£ 2,304.00||£ 1,584.00||£ 864.00|
What can you do? You do have choices – some less palatable than others. I know some landlords who are selling up, others who are moving properties into limited companies (or at least any new purchases), and some who are reviewing how they finance their investments. Composure can help with all of these decisions and advise on the tax implications. If you would like more information, please get in touch.
**There are limits to the non-deductible finance charges that can be relieved – quite a complicated formula based on the actual finance charges, the property income profits and the amount by which your income exceeds the personal allowance. However unrelieved finance charges can be carried forwards. The financial illustrations assume that the non-deductible interest is lower than both the property income and the amount by which the taxpayers income exceeds their personal allowance.