April will mark the start of another measure designed to increase tax for buy-to-let (BTL) investors.
From 6th April, landlords will begin to lose the right to claim back their mortgage interest costs at the rate they pay income tax. For some landlords, this relief is currently up to 45 per cent. Instead, they will see the relief decrease over the next three years and replaced with a 20 per cent tax credit.
We have seen a substantial drop in the number of new buy to let enquiries since these changes were announced.
Prior to that, around one in five new enquiries were new buy to let purchases whereas now I would be surprised if it is one in ten. As a broker, we have always been heavily into let to buy (letting out your current home with the view of buying a new main residence) and whilst we still do a reasonable amount of this business the changes in tax relief and the additional 3% stamp duty if you do not sell your main residence have certainty cooled the market. We are still very busy with buy to let re-mortgages.
The reality of course of these changes as most experienced brokers will tell you is that landlords will attempt to increase rental rates in order to recoup costs.
From 6 April 2017, only three quarters of interest on any BTL mortgage can be offset against rent for tax purposes, with a 20% tax credit given for the remaining quarter. By 2020/21 there will be no offset and in its place will be a 20% tax credit for all interest paid, equivalent to basic rate relief.
If you are a higher or additional rate taxpayer, this will mean a drop in net income. A typical example based on rental income of £10,000 and interest of £6,000 paid by a higher rate taxpayer is shown below.
|Interest paid and offset||(6,000)||-|
|Tax @ 40%||(1,600)||(4,000)|
|Interest paid not offset||-||(6,000)|
|Interest tax credit @20%||-||1,200|
The fact that by 2020/21 your full rental income (less expenses) will be taxable means an increase in your total taxable income. This could mean you cross an income threshold triggering extra tax or you are pushed into a different tax band.
And before you think “I’ll sell up”, remember that the capital gains tax (CGT) rates were not cut for residential property: they remain 18% within the basic rate band and 28% above. Worse still, from April 2019, CGT on residential property will be payable within 30 days of sale.
All these tax changes have significantly reduced the appeal of BTL for many, even before you consider the possibility that interest rates could start rising in the future.
Getting advice from a good accountant and a good broker are as essential as ever.