The Buy to Let market seems to have taken a little bit of a hit lately with the changes to the way the tax is calculated. Not much has changed in many ways (or so it seems) but the way the sum is calculated has – and the results can be a little bit scary for Buy to Let Landlords.
Whilst the change has had an impact on Buy to Let Landlords, it’s not all bad news!
In a nutshell, the new way of calculating tax is based on profit excluding loan interest rather than profit as we know it, meaning that tax will possibly be payable on nonexistent income. Landlords will no longer be able to deduct the cost of their mortgage interest from their rental income when they calculate their profits on which they pay tax. In other words, tax will be applied to the net rent received (income less direct expenses) rather than what is left of the rent after the mortgage interest has been paid.
The reduction in relief is being phased in between now and 2020 and will be replaced by a 20% tax credit. From 2017, landlords can offset only 75% of their mortgage interest against their profits. This falls to 50% next year, 25% in 2019 and zero in 2020.
While the move mainly affects those who already pay higher-rate income tax, it will push some basic-rate taxpayers into the higher-rate bracket once their rental income has been taken into account.
The change applies only to private individual landlords and not to those who own property through companies.
What can be done?
To be forewarned is to be forearmed! It’s about understanding your costs and how you can offset them. One option would be to use a buy-to-let offset mortgage to help cut costs. You can put any savings or rental income into the offset account, reducing your monthly interest bill.
Alternatively, it may be best to look to a fully managed property service as costs such as this are deducted.
A further consideration is to look at converting all or part of an interest-only mortgage to a repayment loan, depending on your long-term plans. Property is still a good long term investment and this change doesn’t change that fact!
For further help and a chance to chat through options, please get in touch with one of our expert Cavendish Rentals team 01244 401440