Ardent Team

25 June 2019

Buy to Let Mortgage Interest: Changes Affecting Landlords

Under the new rules introduced by the HMRC in April 2017, Landlords will have started to see the effects of the tapered reduction in tax relief on Buy-to-Let mortgage costs. Here’s what they could mean.

Previously landlords only needed to declare rental income net of mortgage interest, which resulted in potential savings of thousands in tax. However, that was all changed back in April 2017. The changes meant that most landlords would see a sharp rise in their tax bills.

The changes have been introduced on a sliding scale since 2017 meaning that the full effects of the tax increases will not be felt until 2020. That said, landlords will have started to feel the pinch already.

 

Mortgage tax relief for a higher rate taxpayer who owns a property receiving £700 rent and paying £300 mortgage per month

Tax Year

% of mortgage interest deductible under the previous system

% of mortgage interest qualifying for 20% tax credit under the new system

Tax bill

Net rental income once mortgage costs and tax has been deducted

Prior to April 2017

100%

0%

£1920

£2880

2017/18

75%

25%

£2100

£2700

2018/19

50%

50%

£2280

£2520

2019/20

25%

75%

£2460

£2340

April 2020 onwards

0%

100%

£2640

£2160

In the example above, from April 2020, the landlord will pay £720p/a more in tax under the new regime as they will no longer be able to deduct their mortgage costs from their rental income. Instead, all rental income earned will become taxable and they will receive a 20% tax credit for the mortgage interest they pay.

The new tax changes may increase landlords’ tax bills in two ways:

Landlords who are higher or additional-rate taxpayers no longer get all the tax back on their mortgage repayments. The credit only refunds tax at the basic rate of 20%, as opposed to the top rate of tax paid.

Furthermore, as landlords now have to declare gross rental income on their tax return, it could force some into a higher tax bracket further increasing their tax bill.

Is it possible for landlords to keep their mortgage interest relief?

It is worth noting that these tax changes only affect private landlords and not people who own and run their properties through a business. As a result of this, we have seen a number of clients starting to inquire about the potential benefits of transferring their existing portfolio into a limited company specifically set up to own and run the rental properties.

In theory, doing this will mean that landlords are able to continue to declare rental income net of mortgage costs. However, there are a few things to consider.

Firstly, if the properties are already owned then there will be additional stamp duty to pay when ownership is transferred to the limited company.

Secondly, the mortgage providers who are willing to lend to limited companies charge higher interest rates compared to those on offer for private individuals.

Finally, if the properties are owned through a limited company, accounts will need to be filed for the business through an accountant and corporation tax will need to be paid on any profits the business makes. To personally receive income from the business, landlords with then need to pay themselves a dividend which is taxed differently to personal income.

To really understand whether limited company ownership is right for a landlord, we recommend working with a Mortgage Broker and Accountant who will be able to discuss the pros and cons of both.

 

 

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