New BTL rules mean higher tax bills for many

10th October 2017

Rod Milne, Joint Managing Director of Financial Specialists, HFS Milbourne, and Irena Padol, tax partner, Bessler Hendrie, Chartered Accountants look at the implications of the new tax rules for buy to let investments   

New BTL rules mean higher tax bills for many

The way that income from buy to let (BTL) investments is taxed changed last April leaving many landlords looking for ways to protect themselves from paying more tax.

As a result of the new rules, higher rate taxpayers can no longer offset all of their mortgage interest against rental income before calculating the tax due. A reduction in tax relief is being phased in over the next three years and will be replaced by a 20% tax credit. From 1st April 2017, only 75% of any mortgage interest can be offset against profits.This falls to 50% next year, 25%c in 2019 and zero% in 2020.

“For the first time landlords will be assessed on their gross rental income as opposed to their profits, although an adjustment will be made for property maintenance and similar expenses. This move could force some landlords into higher tax brackets which would result in an overall drop in their net profit,” said Irena.

Below is an example of a landlord who earns £42,000pa PAYE income and £36,000pa in rental income, with £24,000pa in mortgage interest costs:

Tax year 2016/17 2017/18 2018/19 2019/20 2020/21
Rental income £36,000 £36,000 £36,000 £36,000 £36,000
Mortgage interest £24,000 £24,000 £24,000 £24,000 £24,000
Taxable rental income £12,000 £18,000 £24,000 £30,000 £36,000
Tax due on rental income £4,600 £7,000 £9,400 £11,800 £14,200
Mortgage interest relief £1,200 £2,400 £3,600 £4,800
Tax paid on rental income £4,600 £5,800 £7,000 £8,200 £9,400
Profit £7,400 £6,200 £5,000 £3,800 £2,600


Moving property into a limited company

These changes only apply to private individual landlords and not to those who own property through companies. ”One option to avoid the tax burden is to move privately owned properties into a limited company structure, although the costs associated with this can be prohibitive,” explained Irena.

“Lenders are looking at BTL limited company mortgages more favourably. Typically a limited company will be able to borrow 16% more than a private BTL, though that comes at a price as the interest rates are usually about 1% higher,” said Rod.

“In light of these changes, it would be worthwhile for anyone who is looking to purchase a BTL property to take professional mortgage and tax planning advice before making a commitment.”

HFS Milbourne Financial Services is authorised and regulated by the Financial Conduct Authority (FCA) and specialises in wealth management, pensions, finance on divorce, mortgages, employee benefits and corporate financial planning.  

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