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Are Buy-to-let Investors going to get clobbered with the new tax?

View profile for Paul Engelbrecht
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25% of buy-to-let investors are set to sell their rental properties as a result of impending Government changes to taxation rules.

In a survey of over 1,000 experienced Landlords, 25% have already sold or are planing to. Those hardest hit will be the high rate tax payers, who have large mortgages and could find themselves in a deficit immediately.

From 2020, Landlords will not be able to deduct the cost of their mortgage interest from rental income when they calculate the tax due, hence tax will be paid on turnover, rather than profit.

The main change is that instead of being able to deduct mortgage costs, Landlords will have a 20% tax credit, which will leave many high rate tax payers with squeezed profits when these phased changes start in April 2018.

Every year this allowance will be eaten into, until 2020, when there will be no ability to offset their costs against income at all.

Lower rate tax payers may be pushed up a band, losing many of the associated benefits.

Landlords may want to consider incorporating (As buy-to-let companies are not affected by these tax changes), although they will be subject to higher rates of Stamp Duty and Corporation Tax.

The other impact that is likely to be seen is that rents will increase to cope with these tax changes and the full costs shown that Tenants will bear the brunt of these tax changes and are likely to see their rents increased. Others will lose their homes when investments are sold.

The bottom line is that this will encourage first time buyers (provided they are placed with a deposit to proceed) and that should then give the necessary start for some first time home buyers. This may impact on the new build market (who may lose some demand for this short term), but be warned that if you miss this boat, it may be quite some time before you can get back on the housing market, as once matters have settled down with this, first time buyers may find themselves remaining at home longer, unable to afford properties or the higher rents.

Key points are also that for high rate tax payers, mortgage costs above 75% of rental income will make their buy-to-let investments loss-making and mortgage interest relief will be restricted to 20%, meaning that higher and additional rate tax payers will be particularly affected.

Please see example below, where Landlord pays 40% tax:

Example: Landlord pays 40% tax

Now your BTL earns £20,000 a year and the interest-only mortgage costs £13,000. Tax us dye on the profit. You pay tax on £7,000, meaning £2,800 for HMRC and £4,200 for you.

From 2020 tax is due on your full rental income of £20,000, less a tax credit equivalent to basic-rate tax on the interest.

You pay 40% tax on £"0,000 (£8,000), less the 20% credit (20% of £13,000 = £2,600).

HMRC gets £5,400 and you get £1,600. Your tax bill has gone up by 93%.