Don’t get floored by a buy-to-let profit slump: How to protect your investment as tax hikes start to bite
- Landlords are being urged to seek out cheaper mortgage deals quickly
- The way tax is calculated on buy-to-let income is changing in April
Landlords are being urged to seek cheaper mortgage deals fast to keep costs low as new tax rules are set to bite into their profits.
In April the way tax is calculated on rental income from buy-to-let investments is changing.
Investors will no longer be able to deduct mortgage interest costs from rental income when calculating the taxable profit.
Instead, they will be taxed on their rental income while receiving tax relief on mortgage interest payments.
This relief will be reduced in stages to 20 percent by 2020. So currently, someone receiving £10,000 of annual rental income and paying mortgage interest costs of £8,000 will be taxed on profits of £2,000.
The actual sum will depend on whether they are a basic, higher or additional rate taxpayer. But for a higher rate – 40 percent – taxpayer, the bill will be £800.
But under the new tax regime, by 2020 this landlord will be taxed on the £10,000 of income (£4,000) while receiving 20 percent relief on £8,000 of mortgage interest (£1,600) making their overall tax bill £2,400, three times what it is now.
Though the changes are being phased in over four years they will mean bigger tax bills – and smaller profits – for many landlords. Some investors will also be pushed into a higher tax bracket as a result.
The changes are part of wider moves by the Government, which unveiled its White Paper on housing earlier this month, to take the heat out of the housing market and help first-time buyers on to the ladder.