Buy-to-let tax trap!

  • by Carole Jordan
  • 23 Oct, 2015
A close reading of the summer Finance Bill has highlighted a buy-to-let tax trap! Further limiting tax relief for interest on buy-to-let mortgages.

Future buy-to-let tax trap

The July Budget included an attack on individual investors in buy-to-let residential property. As well as abolishing the 10% wear-and-tear relief for furnished lettings from next April, the Chancellor also announced a deferred and staged reduction in the maximum amount of tax relief on finance costs. At present all interest for purchasing buy-to-let housing is fully tax-relievable against rental income, so if you are a higher rate taxpayer, the interest you pay benefits from 40% tax relief. In 2017/18, 75% of your interest will be fully relievable and a quarter will be relieved at only basic rate. In 2018/19 the split becomes 50/50 and in 2019/20, 25/75. By 2020/21 the tax relief you will receive will be limited to basic rate on all interest.

The way this will be achieved has now been made clear in the Finance Bill. The basic rate relief will be given as a tax credit rather than allowing a proportion of the interest to be offset against rental income. This may sound an arcane difference, but it could be costly for some buy-to-let investors because it increases their total net income figure. The example below shows the effect on child benefit tax, but there are similar consequences for phasing out of the personal allowance and loss of the forthcoming personal savings allowance.

Buy-to-let increased income...

Tom has income from earnings and non-property investments of £45,000. He also owns a buy-to-let property which produces £15,000 a year rental income after fees, but before deduction of £11,000 a year mortgage interest.
In 2016/17, his net taxable income is £49,000 (£45,000 + £15,000 - £11,000).
As this is under £50,000, he is not subject to the child benefit tax charge.
In 2017/18, the new rules for buy-to-let interest relief start to be phased in and only 75% of the interest is allowable against the rent.
All other things being equal, Tom’s net taxable income thus rises to £51,750 (£45,000 + £15,000 - £11,000 x 75%) and he starts to be liable for some child benefit tax charge. By 2020/21, none of the interest is allowable and Tom’s net income is £60,000, at which point the child benefit tax charge is equal to 100% of the child benefit).
Buy-to-let has been a popular investment, but this latest twist is another reminder that the tax benefits will not be as good in coming years.

For more advice call one of our advisors on 01273 882200.
All details above were correct at the time of publishing - for more up to date information please get in touch .

You might also be interested in...

If you enjoyed the blog, why not leave us a comment, or share it with a friend...

Free advice delivered to your inbox

Browse our other blog posts...

Our latest blog

by Carole Jordan 19 Jan, 2018

It’s always nice to reward your employees, especially those who may have worked for your business for a long time. Find out how you can do this and still reap the tax benefits.

by Carole Jordan 12 Jan, 2018
Now, more than ever, exporting across the world offers an opportunity not seen for many decades. 

If you want to grow your exports then the government want to help you on your way with Finance, Insurance and opportunities to meet potential customers. Yippee!

by Carole Jordan 08 Jan, 2018

There’s a hidden gap in skills and knowledge between those of us who are qualified Accountants, and those who refer to themselves as Accountants.  Every day we make an investment in your business to ensure you receive the quality of advice you need to protect your business.

by Carole Jordan 03 Jan, 2018

It’s January and its ‘National Pay Your Self-Assessment Tax Month’!
Your tax return should be safely in the HMRC net now but if you didn’t file before 12th December you will not receive a statement and payslip in the post. In any case, it’s best to brace yourself for making the payment as the statements are drip feeding very slowly through the postal system as I write.

by Carole Jordan 15 Dec, 2017
An easier way to pay your impending tax bill could be through your PAYE tax code. Find out if you qualify and how you can go about setting this up.
More posts
Share by: