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Could shock new tax changes spell the end of buy-to-let?

Wednesday, February 3rd, 2016

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Many landlords have been left reeling by Chancellor George Osborne’s announcement, made in the summer Budget, that they will be facing increasingly hefty tax increases over the next few years. The new tax regime is complex, but increasingly clear is its potential to severely disrupt the buy-to-let market.


The new tax changes in a nutshell


The tax increases will be gradually phased in between 2017 and 2020. Osborne has implied that only higher-earning landlords will be hit by the changes; indeed, there will be significantly higher financial outlay from every mortgaged landlord paying 40pc or 45pc tax.


However, some landlords on the basic rate of tax will also be hit, as the changes will shift them to a higher rate. Meanwhile, very wealthy buy-to-let investors who use cash, rather than a mortgage, to buy property will be unaffected. This is because, ultimately, landlords will be losing their ability to deduct their mortgage interest expenses from their rental income as they calculate their profit that tax will be levelled on.

A worked example of how the changes will affect landlords


Let’s look at the example of a landlord with a buy-to-let yearly earning £20,000 and an interest-only mortgage yearly costing £13,000. Right now, tax is imposed only on the difference or profit – so, in this instance, on £7,000. Supposing the landlord pays 40pc tax, £2,800 of this profit will go to HMRC, leaving £4,200 for the landlord.


However, in 2020, that same landlord would have to pay tax on their complete rental income of £20,000, minus a tax credit identical to basic-rate tax on the mortgage interest. Paying 40pc tax, they would therefore pay £8,000, less £2,600 as a result of a tax credit of 20pc. This means that £5,400 would now be given up for the taxman, leaving £1,600 for the landlord.


That’s a significant increase in the tax bill, but it would be even worse if this landlord’s Bank Rate – and, as a result, mortgage rate – saw a small spike leading to a yearly mortgage cost of £15,000 while the rent stayed at £20,000. £5,000 of tax would have to be paid in this case, completely wiping out the landlord’s profits.

Landlords should prepare carefully for big tax changes

Landlords should also consider stamp duty increases, to be enacted in April, on buy-to-let property purchases. We at Accounting People can provide advice to help landlords with preparing for the various tax changes.


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