Tax Relief Changes For Landlords

Recent research conducted by the National Landlord Association (NLA) has calculated over 440,000 basic rate taxpayers will move up to the ‘higher rate’ tax bracket. More alarming is that a large percentage of these, do not understand the implications of the recent changes, that are slowly being implemented over the next 3 years.

Summary of the Changes:

• Mortgage Tax Relief will be limited to the basic rate of tax (currently 20%), as a reduction in tax liability instead of a reduction to taxable rental income.
• With taxable income now being calculated without a reduction for finance costs, some landlords may experience an upward move to the ‘higher rate’ tax band – 40% or 45%
• Other allowable costs, on an actual cost basis, can still be deducted from gross rental income for the purposes of determining taxable income.
• Potentially this could mean some landlords currently making a small net profit will experience negative cash flow after these tax changes

These changes have started to be phased in from April 2017:

                                                                                                                                  *Source – The Mortgage Works

To Illustrate the impact of these changes below are two possible scenarios: *

Single Property Landlord 20% Tax Band

David has recently become a landlord and only has one property. His total annual income is £25,000, putting him in the 20% tax band.  His income is made up of £15,000 employment income and £10,000 rental income.   Currently David’s mortgage interest payments are £4,000 and his running costs are £2,000 per year, leaving him with £4,000 gross profit from his rental property.

Prior to April 2017, David was only required to pay 20% income tax on his £4,000 gross profit, rather than his rental income of £10,000.  As a result of this David is only due to pay £800 income tax on his gross profit for 2016/2017 leaving him with a net profit of £3,200.

Once the tax relief changes have been fully implemented, David will be taxed on his total rental income (minus running costs) which equates to £8,000, rather than just his £4,000 gross rental income. In this scenario, David would be liable to pay £1,600 tax, however he is eligible for 20% tax relief on his mortgage interest payments (£4,000) so would get £800 deducted, leaving him with a total of £800 to pay.

This would still leave David with a net profit of £3,200 and he wouldn’t be affected by the changes.

Single Property Landlord 40% Tax Band

Deborah is a single property landlord.  She has an annual employment income of £50,000 and earns an additional £10,000 from her rental income, giving her a total income of £60,000.  Deborah has to pay 40% tax as she is a higher earner.  Currently Deborah’s mortgage interest payments are £4,000 and her running costs are £2,000 per year, leaving her with £4,000 gross profit from her rental property.

Prior to April 2017, being a 40% tax payer Deborah will be liable t0 40% tax on her rental income profit which means she has to pay £1,600, reducing her total profit to £2,400.

After the tax relief changes are implemented in 2020, Deborah will be expected to pay 40% tax on her rental income (minus allowable costs) which means the tax she owes will go from £1,600 to £3,200.  However, Deborah will be eligible for 20%tax relief on her mortgage payment (£4,000) which will total £800.  This will have a substantial effect on her overall profit, reducing it from £2,400 to £1,600

What Options Are Available To Landlords

To negate these changes, landlords need to ensure they are making the most of what is available to them, a few examples of these are:

• Limited Company – May consider the option of purchasing under a limited company or transferring existing portfolio over into one.  However, this can be beneficial to some landlord and not to others.  Therefore, it is very important to obtain advice from an independent tax adviser before you do this.
• Mortgage Interest Rate - Presently, there are some very competitive mortgage interest rates available in the market, ensure you are taking advantage of these.   If you would like to review your options, please contact us so we may refer you to our ‘Independent Mortgage Consultant’ by clicking here or call us 01628 672111
• Rental Income/ Letting Agency Fees - Are you receiving your potential rental income from your property?  Is your present letting agent reviewing you’re the rental income on a regular basis based on the market conditions? What fees are you being charged by your agent for the management of your property.    With the new additional expenses going forward, it is becoming more imperative that these areas are maximised.  If this is an area that has not been reviewed recently, please contact us for a free valuation by clicking here or call us 01628 672111

Tax information is based on our understanding of the tax legislation proposed, and may be subject to change.    No information in this document should be taken as tax advice.  For advice, you should consult with an independent tax adviser