Budgets have been very hard on the buy to let landlord as explained in the following article
2015-16 removal of wear and tear allowance
For many years’ landlords who let property which was “fully furnished” have been able to claim an allowance each year equal to 10% of the rental income to reduce their tax liability.
A higher rate tax payer with rental income of £20,000 per year has been able to save £800 per year or 4% of the total rental income because of this.
This has always been a very generous allowance which for some landlords was the difference between having to pay tax or not. The allowance has been completely withdrawn from 6 April 2016 and in future landlords will only be able to claim for the cost of any replacement furniture or white goods.
Whilst the restriction in the amount of mortgage interest that can be claimed against rental income has been the focus of the financial press this change could have much more of an impact on the return achieved from the buy to let investment. This will lead to increased tax having to be paid on rental income.
2016 -2017 Mortgage interest tax relief phased out
As you will all be aware from next tax year (2017-18) mortgage interest on but to let properties will no longer be a deduction from “profit”. Instead you will receive a basic rate tax credit of 20% of the mortgage interest.
If you are a basic rate tax payer, ie your total income from all sources is below £43,000 then this will not change your actual tax liability, However if you are a higher rate tax payer this will have a considerable impact on your tax liability.
The government announced in the autumn statement that the rate at which you start paying 40% tax will increase to £50,000 so that will offer some hope to the smaller landlord that these rules may not apply.
Rental income £10,000
Mortgage interest £3,000
If you are a basic rate tax payer you would pay 20% x £7,000 = £1,400 in tax. If you are a higher rate tax payer you would pay £2,800 or 40% x £7,000.
Under the new rules if you are a higher rate tax payer you will actually pay £3,400 in tax.
This is calculated as follows
Profit on rental income £10,000
Tax at 40% £4,000 less basic rate relief on mortgage interest being 20% x £3,000 or £600 leaving tax to pay off £3,400.
If you earn over £150,000 and pay tax at 45% then the changes in rules are even more costly.
These rules are being phased in over the next 3 tax years but from 2020-21 these will be the tax liabilities landlords will be facing.