The changes implemented by the Treasury to restrict landlords on the profits they make in 2016, have not ceased. Very shortly and up to the year 2020, tax relief for landlords is being marginalised. The outcome is landlords won’t be making as much profit as before. This is entirely deliberate on the Government's behalf; more money to the treasury.
At present, landlords can claim tax relief on their mortgage interest payments. Landlords pay tax on their profits according to their income tax band. So, in this simplified example, a basic-rate taxpayer would pay 20% tax on £1,000, or £200, and keep £800. The tax bill for a 40% taxpayer would be £400, leaving £600, or £450 for a taxpayer at the 45% additional rate, leaving £550. (Example courtesy of moneysavingexpert)
From April 2017, mortgage interest tax relief will gradually be cut back to 20% between 2017 and 2020.
So, our landlord with rental income of £10,000 and £9,000 of mortgage interest to pay will in future have to pay tax on the full amount, less a 20% credit on the mortgage interest. The tax bill for a higher rate taxpayer would therefore be higher. If you are in higher-rate tax band, the tax relief changes will eliminate your profit if your mortgage interest is 75% or more of your rental income. The tax liability of a basic-rate taxpayer is, however, unchanged. However, the new profit calculation could push a basic-rate taxpayer into a higher tax band.
As we explained in issues 1 and 2 of our newsletter, many landlords are moving their properties to Ltd company status, as these will not be affected by such tax relief changes. You can read the articles here (Kieran, I will link to your articles).
It still possible for a landlord to offset the following changes:
- letting agents’ fees
- legal fees
- accountants’ fees
- buildings and contents insurance
- interest on property loans
- maintenance and repairs to the property
- utility bills, like gas, water and electricity
- rent, ground rent, service charges
- Council Tax
- residential services such as domestic cleaners or horticultural assistance.
- other direct costs of letting the property, such as phone calls, stationery and advertising
To further understand these changes, please speak directly to your accountant. If you would like to speak a chartered accountant, Hayes Finance are linked to a number of credible sources, so please do email us: firstname.lastname@example.org