As you may have read in the press recently, radical changes to rates of tax paid on rental income have been passed by Government, and are set for implication in 2017.
Higher rate tax payers who own buy-to-let property, and on which there is a large mortgage, will pay substantially more tax. Current base-rate tax payers may also suffer, as the changes may push them into a higher tax bracket.
Those worse effected may see the actual tax they pay on their investment rising two-fold (or more). Some will also see their tax payable rising above 100% meaning all of their profit is paid in tax, or worst still, the level of tax pushing them into making a loss - resulting in a landlord having to raise rents or exit the market altogether.
The mechanics of the changes are that a landlord will lose the ability to deduct their mortgage interest from the rental income when calculating profit. This means that the Chancellor wants to tax landlords on their turnover rather than profit, meaning, in effect, that tax will be paid on non-existent income.
The easiest way of explaining the changes is by showing a worked example...
Mr Landlord is on a 40% rate of income tax, and has a property
that brings in £1000pcm. His mortgage interest comes to £750 per month.
Currently this means he will pay 40% tax on the difference
between his rent and the mortgage interest i.e. £250 difference (profit), less 40% tax
(£100) = £150 per month profit.
However the changes mean that the 40% tax will be applied to
the whole rent (less a new 20% tax credit calculated on the mortgage
interest) i.e. £1000 rent received, less 40% tax (£400), plus 20% tax credit based on
£750 mortgage interest (£150), less the £750 mortgage interest = ZERO profit per month.
Landlords with properties without mortgages will be unaffected. These changes, coupled with the prediction of interest rate rises next year could mean that now is an excellent time for landlords to review their financial affairs.
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