George Osborne left several gifts for landlords before vacating the treasury. The first has already come into force which is the increase in stamp duty for the purchase of a buy to let property. The second is a reduction of tax relief that landlords can claim against mortgages.
As it currently stands, say you’re rent is £10,000 a year and mortgage is £9,000 a year, you make a £1,000 profit. A basic rate tax payer would pay 20% (£200), higher rate 40% (£400) and top tier 45% (£450) to HMRC.
This is going to be reduced and for 2017/18 this will 75% of your mortgage interest that is tax deductable, 2018/19 50%, 2019/20 25% and from 2020 onwards 0% tax relief.
If we look at next year, that means of the £9,000 mortgage, you will be able to claim relief on £6,750 (75%) of your mortgage meaning £2,250 will be considered profits, so a total profit of £3,250. At a basic rate of income tax at 20%, that’s £450 tax to pay, at 40% it’s £900 and at 45% it’s £1,012.50 (which is technically a loss) to be paid to HMRC.
Of course, the above doesn’t take into account other deductable property expenditures, but as a basic guide, that’s the difference that it will make to you.
The only way of avoiding these tax increases is to place your property/properties into a limited company and then pay corporation tax of 20% on profits but still be able to claim 100% mortgage relief. Theresa May has said corporation tax will be reduced to 17% by 2020, so worth a look into if you’re a higher rate tax payer.
As always, it’s best to start planning your finances early rather than be caught out with a hefty tax bill you can’t cover. Crunch some numbers and be prepared!