Landlords who own property with a mortgage and have been able to claim higher-rate tax relief of 40%-45% on their mortgage interest (and other finance) costs, will see that relief reduce by 25% each year, down to a maximum rate of 20% by 2020/21:
|Tax Year||% of finance costs deductible at a higher rate||% at basic rate tax level|
Although this looks like very bad news, it does only affect one in five landlords. What makes things hard for those landlords is the way it’s being implemented by HMRC. Because the way your accounts are carried out will change, it means even borderline lower-rate tax payers could be affected.
But if you’re one of the four in five landlords who isn’t affected, you can breathe a sigh of relief, and if you own your buy to let outright, you can just sit back and enjoy your current returns. However, it’s still worth checking your situation with a qualified tax accountant that has property expertise. You need to know whether these changes will impact you and, if so, what your finances will look like in 2020/21 when the relief’s dropped to a maximum of 20%. And you never know – while they’re checking your accounts, they might discover other savings you could be making!
Here’s an example of how property accounts could be affected:
Net rental income:
|£4,000||£7,000 (can't deduct the mortgage interest)|
|£1,600||£2,800 - 20% relief on the £3,000 mortgage interest = £600|
|0%||£2,800 - £600 = £2,200|
If you’ve got any concerns about what changes are on their way and haven’t already, do come and speak to us in your local Your Move branch. We’ll do all we can to help make sure your investment keeps doing well for you.