Are these buy-to-let tax changes the death knell for small property investors? Ned Browne has the low down. 

As of April 2017, property investors were no longer be able to offset all their interest payments against their profits. This tax year, the amount you’re allowed to offset drops to 75 per cent of mortgage interest payments. The rates fall further in 2018, 2019 and 2020 to 50 per cent, 25 per cent and then 0 per cent respectively.

In place of offsetting interest payments, landlords will be able to claim 20 per cent tax relief against these payments. On the face of it, the changes would seem to mainly affect landlords who already pay higher-rate income tax. However, many basic-rate taxpayers could be pushed into this higher-rate tax bracket once their rental income has been included.

 

What does that look like in the real world?

The table below assumes the current tax brackets are still in existence in 2020 (the year you can no longer offset any interest payments), so we are able to make like-for-like comparisons.

Before changes

   

After changes (2020)

 

Income

£41,500

 

Income

£41,500

Gross rental income

£14,400

 

Gross rental income

£14,400

Less mortgage income

£4,800

     

Total income

£51,100

 

Total income

£55,900

         

Tax

       

£11,500 @ 0 per cent

£0

 

£11,500 @ 0 per cent

£0

£35,500 @ 20 per cent

£7,100

 

£35,500 @ 20 per cent

£7,100

£4,100 @ 40 per cent

£1,640

 

£8,900 @ 40 per cent

£3,560

     

Less tax relief on mortgage interest (£4,800 @ 20 per cent)

£960

         

Total tax paid

£8,740

 

Total tax paid

£11,620

 

What should you do?

There are stories circulating online about top-rate taxpayers selling their property portfolios and buying mortgage free properties in cheaper parts of the country. This seems a little dramatic, given the inevitable capital gains tax they will face.

That doesn't mean you should adopt the ostrich approach. Accurately work out your additional tax liability, and see if you can make up that money elsewhere. Could you gradually increase rents (without increasing the risk of voids)? Are you able to find a better mortgage deal? Could you start overpaying on your BTL (buy-to-let) mortgage to reduce the outstanding mortgage?

Now is the time to crunch the figures, Google the various tax calculating tools available and/or sit down with your accountant.

 

Will the changes affect investors’ ability to borrow money?

Mortgage lenders will undoubtedly tighten their lending criteria when the rules are fully implemented. 

Currently, all BTL borrowers undergo stress tests based on their ability to pay the mortgage if interest rates rose and these tests are likely to become more strenuous. 

There is a certain irony in this, as most BTL mortgages are fixed rate. But, hey ho.

 

Property is the ultimate long-term investment

It’s an old adage, but it’s never been truer. The property market is currently flat across most parts of the country. There’s nervousness about Brexit. There’s the additional 3 per cent stamp duty to deal with too. But, fortune favours the brave. 

Those looking to invest over the long term—ten plus years—should still reap sizeable rewards.

 

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