In the Summer Budget it was announced that mortgage interest relief for buy to let landlords would start being phased out from 2017/18 onwards and restricted to basic rate only from 2020/21. Now that the Finance Bill has been published the full impact of this change is starting to emerge and for some landlords this will result in a significant increase in the tax payable as their rental profits will now be taxed at higher rates.
This is because mortgage interest will no longer be an allowable deduction in arriving at rental profits. For example a landlord with £60,000 of gross rental income, £6,000 of agent’s commission, £8,000 of repairs and other expenses and £40,000 of interest would currently have £6,000 of net rental profits. However, from 2017/18 the interest relief will start being restricted, and from 2020/21 there will be no deduction for interest, which would mean that, assuming the rent and expenses remain the same, the taxable rental income would be £46,000.
For many landlords this will mean that the rent will fall into the higher rate tax bands and the £40,000 interest will result in a £8,000 basic rate tax reducer to set against the tax liability.