Buy To Let Tax And How It Affect Landlords

Many landlords have vacated the industry over worries of huge tax bills and exposing themselves to more hassle than its worth but should they all be panicking?

Before I go any further, I must stress I am a mere letting agent and while I have most certainly done my homework on the matter, no information in this blog should be taken as tax advice!!! For advice, I suggest you contact your IFA/accountant to double check everything I am writing about!

Tony knows what these new landlord tax rules are like!

What’s Going On?

Lets start at the beginning: 2017/18 saw the start of an start of the new tax regime. Before this, landlords were allowed to deduct mortgage interest and other allowable costs from all rental income received prior to being taxed. Good old spreadsheet Phil took objection to this and decreed that landlords should not be allowed to do this and thus came the purge of landlords! This does not include the stamp duty surcharge of +3% to anyone who dares aspire to own more than one property i hasten to add!

As of 2020/21, landlords will be taxed on their full rental income rather than rental income less mortgage interest. “What is the impact on me?” I hear you say. Well, that depends on position regarding your property:

Those that will be hit hardest!

  1. Higher Rate Tax Payers
  2. Landlords with high mortgage costs in comparison to low rental income
  3. Landlords who may become higher rate tax earners due to the changes

One thing that should be mentioned is that, despite all your rental income now being taxed rather the “income minus mortgage interest”, there is some mortgage interest relief applied post tax calculation. Therefore, if you’re earning £x from your rental property, once you have taken off your allowable expenses, you calculate your taxable income THEN you can then apply the Mortgage interest relief at 20% (basic rate). This amount is then offset against the tax calculated. Does that make sense? To summarise, we now have the following:

Basic Calculations

Rental Income minus allowable expenses = Taxable Rental Income.

Taxable Rental Income is taxed at the rate depending on your financial situation = Tax Due.

20% of mortgage interest can then be subtracted from your Tax Due.

You can then see what you must have over to the Exchequer and what will be due to you.

So Now What?

So getting back to the initial question: Should all landlords be running for the hills and sell their rental property? I would say it depends on your circumstances most certainly but one should also look at the industry as a whole and not just these set of rules. It is well publicised that landlords are exiting the market at a fairly alarming rate (click here). This may be because lots of landlords are focusing on the capital growth of housing and the impending doom of Brexit (or what the media would have you think is the impending doom). Comments from the Governor of the Bank of England regarding the effect a “no deal Brexit” on the housing market was quite shocking to say the least (see the BBC for more information here).

But I don’t Want To Not Be A Landlord!

However, as we wrote in September 2018 (click here), there is cause for optimism with rental prices expected to rise by 15% in the next 4 years. If landlords do stay the course and are set up correctly as to not be clobbered by tax changes, there is still strong scope for money to be made. It is also important to note that without a healthy rental market, the housing market will collapse. The Help to Buy bubble can not be indefinitely sustained and while builders are making their billion pound profits, not much consideration has been put towards what will happen if the housing market values collapse, especially if there are nor rental properties available. But that’s a topic for another days blogging!

Thanks for Reading

I hope this has been informative and useful. For all property related queries, please contact WitLet on 01376502500 or email us at info@witlet.co.uk and we will endeavour to help out. Alternatively, follow us on Facebook back clicking here

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