Death of buy-to-let?

Some pressure is being put on the Government to reverse the new taxes proposed in the 08 July summer budget for buy-to-let investors.

This unexpected tax increase, on which there was no consultation, will be phased in from 2017 and fully implemented by 2020.

The new rules are fairly complex, so investors are only slowly coming to terms with its effects. Many investors are probably still unaware of the change, or underestimate its impact.

The new rules will only hit landlords with mortgages. Under the new regime, landlords will no longer be able to deduct the cost of their mortgage interest from their rental income when they calculate their profits on which to pay tax. The very wealthy who own property portfolios without mortgages will not be affected.

This means that higher-rate taxpayers who have large mortgages on their buy‑to‑let properties will pay significantly more tax. Some current basic-rate taxpayers will also be hit, because the new rules could push them into the higher-rate tax bracket.

The way it works is as follows for a 40% taxpayer. If your buy-to-let currently earns £20,000 a year and the interest-only mortgage costs £13,000 a year, tax is due on the £7,000 profit. At 40%, this means £2,800 tax is payable, leaving £4,200 for you.

From 2020, tax will now be due on the whole of your rental income of £20,000, less a tax credit equivalent to basic-rate tax on the interest. So you pay 40% tax on £20,000 (ie £8,000), less the 20% credit (20% of £13,000 = £2,600), meaning £5,400 tax is payable, leaving just £1,600 for you. This is an increase of 93% in your tax bill.

However, if the Bank Base Rate and hence mortgage rates were to rise by a small fraction, say increasing your mortgage cost to £15,000, you would have to pay £5,000 tax on your £20,000 earnings, giving you no profit at all.

The worst affected are likely to be middle-income savers who have chosen to invest in buy‑to‑let, as well as pensions and Isas, to supplement their income.

For more information about buy-to-let or for mortgage and financial planning in general, contact Kellands.

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