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Major changes in taxation for owners of buy to let properties

Major changes in taxation for owners of buy to let properties started being phased in over four years from April 2017.

If you own buy to let properties, it’s important to take a look at how these gradual changes may affect you in order to avoid any nasty surprises.

Of course, every individual situation is different, so be sure to consult a professional tax adviser regarding your particular position.

Prior to the tax changes, individual landlords were able to deduct all costs, including mortgage interest, from their rental income, with the net profits taxed at the landlord’s marginal rate.

Landlords are now unable to deduct 100% of their buy to let costs and will eventually be taxed on all buy to let income at their marginal tax rate.

What’s included in the new restrictions? Mortgages, loans, and overdrafts, including any loans taken out for furnishing. Other expenses affected include alternative finance returns, fees, and incidental costs of repaying mortgages and loans as well as any discounts, premiums, or disguised interest.

The new rules have been phased in incrementally over four years since 2017. For the 2016 to 2017 tax year, 25% of rental income was taxable under the new rules. For the 2017 to 2018 tax year the ratio was 50/50, meaning landlords were able to offset 50% of their buy to let expenses, whilst the remaining 50% was taxed at the marginal rate.

The 2018 to 2019 tax year saw 75% of rental income being taxed under the new rules, reaching 100% in the current 2019 to 2020 tax year.

Keep in mind these new tax changes will only apply to individual owners or properties owned by a trust. Companies will continue to be taxed the same as before.

Here’s an example of how this might affect you by 2020:

Let’s say Michael has an annual income of £35,000 and gets rental income of £18,000. The interest on his mortgage payments is £5,000. Under the old rules, Michael would have been able to deduct the £5,000 mortgage interest plus other expenses. This means in the 2015 to 2016 tax year, he would have paid 40% tax on only £8,000. Under the new rules, once the phasing in period is complete, £13,000 of Michael’s income will fall into the higher rate tax bracket, currently 40% on income in excess of £45,000.

This means that assuming the tax rate bands stay the same, Michael will pay roughly £2,000 more income tax in 2021.

Other changes to keep in mind include two changes from 2016:

In April 2016, the Stamp Duty Land Tax thresholds were changed, updating the tax rates for residential and additional properties over £125,000. The “Wear and Tear” allowance was also changed, from a flat 10% to an actual-costs only allowance, with proof of purchase required.

It’s likely that many buy to let landlords will find these changes challenging. If you own a buy to let property, consult a tax professional today to see what steps you can take to mitigate the higher taxes.

For further information, or to find out if this campaign applies to you, please contact a tax specialist or visit the dedicated site here.

If you’d like financial advice please get in touch. We can help with Buy to Let mortgages, both in individual names and in limited company names.

If you have a property portfolio, we can review your portfolio and advise on any possibilities for offsetting some of your tax liability. Get in touch here.

HM Revenue and Customs and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen

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