There are some big changes coming up in the buy to let sector that are leading landlords to become increasingly worried. As of April 2017, changes are being made to stop landlords from claiming back the interest paid on their buy to let mortgage. These changes could leave high rate tax payers with the prospect of big losses.
How it works now
As it stands, higher rate tax payers (those earning over £43,000 per year), pay 40% tax on all rental profit.
This means that any payment on an interest only mortgage is deducted from the total rental income before tax is taken off in the form of tax relief.
Total Rental Income – Mortgage Payment = The amount to be taxed
£15,000 pa rental income from a property with a £6,000 yearly interest only mortgage.
This means that the landlord only has to pay tax on the £9,000 difference.
Tax = £3,600
This would leave them with a £5,400 profit after tax.
What are the changes?
From April 2017, the government will be reducing the amount of tax relief available to higher rate taxpayers.
The tax on the interest only mortgage payments will be changed to the 20% basic tax rate for higher earners.
Lower earners will still receive full tax relief on rental income for the interest only mortgage payment.
The landlord would have to pay the new 20% tax on the mortgage payments.
40% tax is paid on the £9,000 = £3,600
20% tax is paid on the £6,000 = £1,200
Tax = £4,800.
Leaving them with a £4,200 profit after tax.
The Impact on Landlords
With interest rates so low, the new tax increase, while inconvenient, doesn’t represent a huge loss for landlords. However, if interest rates were to rise by even a small amount, then the interest rates on a mortgage will rise, driving up interest only payments.
A rise from 2% interest rates to 3% interest could result in the following:
Mortgage payments at 2% interest= £6000
Mortgage payments at 3% interest= £9000
Rental income £15,000 – Mortgage payments £9,000 = £6,000
40% tax is paid on the £6,000 and 20% tax is paid on the £9,000 giving Total Tax £4,200
A rise to 4% would leave them with only £3,000 profit and a tax bill of £3,600, a £600 loss!
If landlords were to reach a point of negative profit, they would have to choose between raising rents to cover the cost, or selling the property, neither of which would be received well by either the landlord or the tenant.
These changes are particularly important for those not already earning above the threshold for higher rate tax. If your rental income was to increase and push you above the threshold, you would immediately be liable for an extra 20% tax across all earnings from rental properties.
Of course, any landlords who do not meet the threshold for higher rate tax and those who do not have a mortgage on their rental property will remain at their current tax level.
The Impact on the Property Market
The rise of the buy to let trends across the country have seen house prices inflate, and properties for buying become more scarce. This has driven most first time buyers out of the market and left areas like London a distant dream for most buyers.
Many people hope that with help to buy and with landlords being priced out of the market, more houses should become available. This increase in availability should help to ease the property price inflation, and make it far easier for first time buyers to get onto the property ladder.
Considering a buy to let mortgage?
If you need further advice, we strongly recommend that you talk to a mortgage broker. They will be able to discuss many of the options available to you and put your mind at ease. Mortgage brokers are highly regulated and qualified to advise you in such matters. For more information regarding the benefits of mortgage brokers, visit http://mybigmove.co.uk/Benefits-of-using-a-mortgage-broker
When dealing with any legal property matters a certified and professional conveyancer is essential. 174 Solicitors can assist you in purchasing a potential rental property and also with many other of your legal requirements; discover our services here http://174law.co.uk/personal-services/property-conveyancing/ or for a quote click here