Budget 2015, Mortgage Interest relief changes for buy to let Landlords

Following George Osborne’s announcement at the proposed changes, we have received a number of calls from Landlords discussing the changes.
First of all, don’t panic, the changes mainly effect the high rate taxpayers.
The changes proposed are to take effect 2020/2021 (with tapered introduction between). So, lets have a look at the Maths. For the sake of arithmetic and ease, we’ll assume the personal tax allowance is £12,000, the basic rate band is £38,000 and higher rate band is £50,000.

Example 1. Mr S, earns a salary of £25,000.
Rental Income received £15,000 (after other rental expenses), Interest on mortgage £9,000. Net profit £6,000.
Under Current Rules, Salary £25,000, taxable rental profit £6,000 = £31,000
Tax @ 0% (£12,000) = £0.00
Tax @ 20% (£19,000) = £3,800
Total Tax £3,800.00

Under New Rules, Salary £25,000, taxable rental profit £15,000 = £40,000
Tax @ 0% (£12,000) = £0.00
Tax @ 20% (28,000) = £5,600
Less tax relief on mortgage interest, £9,000 @ 20% = – £1,800
Total Tax £3,800.00

So, in example one, the tax payable is the same.

Example 2. Mrs R, earns a salary £75,000.
Rental Income received £15,000, Interest on mortgage £9,000, Net Profit £6,000.

Under current rules, Salary £75,000, taxable rental profit £6,000 = £81,000
Tax @0% (£12,000) = £0.00
Tax @ 20% (£38,000) = £7,600
Tax @ 40% (31,000) = £12,400
Total Tax £20,000

Without buy to let (Tax @ 40% £25,000) = £10,000 = Total tax to pay £17,600

Therefore, having the buy to let property, the extra tax is to pay is = £2,400

Under new rules, Salary £75,000, taxable rental profit £15,000 = £90,000
Tax @0% (£12,000) = £0.00
Tax @ 20% (£38,000) = £7,600
Tax @ 40% (40,000) = £16,000
Less tax relief on mortgage interest, £9,000 @ 20% = -£1,800
Total Tax £21,800

So, in example two, the tax payable is £1,800 more.

Without buy to let (Tax@40% £25,000) = £10,000 = Total tax to pay £17,600

Therefore, having the buy to let property, extra tax to pay is = £4,200 tax to pay. It begs the question, making £6,000 and paying £4,200 in tax, which is an effective rate of 70% tax.

Example 3. Mrs J earns £43,000 and he might think he will be unaffected by the new rules because he is under the higher rate tax band of £50,000 but as the example below shows, they will be caught.

Rental Income received £15,000, Interest on mortgage £9,000, Net Profit £6,000.

Under current rules, Salary £43,000, taxable rental profit £6,000 = £49,000
Tax @0% (£12,000) = £0.00
Tax @ 20% (£37,000) = £7,400
Total Tax £7,400

Under New Rules, Salary £43,000, taxable rental profit £15,000 = £58,000
Tax @ 0% (£12,000) = £0.00
Tax @ 20% (38,000) = £7,600
Tax @ 40% (8,000) = £3,200
Less tax relief on mortgage interest, £9,000 @ 20% = – £1,800
Total Tax £9,000.00

Mrs J will have to pay an additional £1,600 in tax. (As her rental profit before tax deduction is £58,000).

What should buy to let investors do? If you are a higher rate tax, it’s worth considering buying the property in a limited company. This way it would attract corporation tax (circ. 18%). However, this brings about further issues in a company obtaining a finance which will be classed as commercial.

As always, the above is guidance and we advise all clients to take their own tax advice as we are not tax experts and do not know the details of clients tax affairs.

If you have a portfolio or looking to rent a property, please contact Clifftons letting agents in Bournemouth for further details. #Landlords #Bournemouth #Letting Agents #clifftons