Loss of mortgage interest relief could bankrupt landlords

[fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”]



 

 

The proposbigstock-Latest-News-icon-7725174ed tax changes in the Budget that will limit and then remove the ability to off-set BTL mortgage interest payments against rental profits. Not all landlord have woken up to the fact how major this change is. In real terms it’s going to effectively increase tax By 60-70% on profits from rental income for a landlord.

This is real game changer! And one really needs to consult a proper accountant who knows their BTL from normal self-assessment.  

The government have thrown a curve ball that is essentially going to make investing in BTL property completely not attractive.

Last newsletter I wrote the head line Et Tu Brute! The reasoning for this was the policy of taxing the landlord by removing eligible deductions, was not mentioned by any party during election.

It’s like we all started playing football. Team one was govt and Team two was landlords. Whilst playing the game the team one changed the rules and started playing Aussie football where they can use hands, feet & head and team two got stuck playing with their feet only and one hand tied behind the back.





Bottom line is landlords will have to start looking at other investment opportunity. It’s defiantly not business as usual.

Either you have move your portfolio to limited company or start increasing rents or give up and sell. All are very complicated propositions and we suggest you get in touch with your tax advisor or if you don’t have one we will be glad to put you in touch with one of our recommended and trusted advisors.

Thank you for reading the newsletter. Contributions always welcomed.

Sincerely yours,

Malay Shah

 

 





The Budget report sets out the context for this measure as follows: (Budget 2015, HC 264, March 2015 para 1.190-1)

Landlords can deduct costs they incur when calculating the tax they pay on their rental income. A large portion of those costs are interest payments on the mortgage. Mortgage Interest Relief was withdrawn from homeowners 15 years ago. However, landlords still receive the relief. The ability to deduct these costs puts investing in a rental property at an advantage. Tax relief for finance costs is particularly beneficial for wealthier landlords with larger incomes, as every £1 of finance cost they incur allows them to pay 40p or 45p less tax … The government will restrict the relief on finance costs that landlords of residential property can get to the basic rate of income tax. The restriction will be phased in over 4 years, starting from April 2017. This will reduce the distorting effect the tax treatment of property has on investment and mean individual landlords are not treated differently based on the rate of income tax that they pay. It will also shift the balance between landlords and homeowners.

Details on how this will work are given in HMRC’s Tax Information & Impact Note: Restricting finance cost relief for individual landlords, 8 July 2015:

Legislation will be published in Summer Finance Bill 2015 to restrict deductions from property income for finance costs for residential properties for individuals and to introduce a tax reduction at the basic rate of Income Tax.

Deductions from property income will be restricted to:

  • 75% for 2017 to 2018
  • 50% for 2018 to 2019
  • 25% for 2019 to 2020
  • 0% for 2020 to 2021 and beyond

Individuals will be able to claim a basic rate tax reduction from their Income Tax liability on the portion of finance costs not deducted in calculating the profit. In practice this tax reduction will be calculated as 20% of the lower of the:

finance costs not deducted from income in the tax year (25% for 2017 to 2018, 50% for 2018 to 2019, 75% for 2019 to 2020 and 100% thereafter)

profits of the property business in the tax year





[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]

Scroll to Top