Residential Landlord – 2017 Tax Changes

In July 2015 The Chancellor announced changes to the way mortgage interest can be off-set against against buy-to-let profits from April 2017.

In essence, the measure will gradually restrict relief, over a three year period, for finance costs on residential properties. By 2020-21 the restriction will be set at the basic rate of income tax, being 20%.

How It Works Now

You let out a property collecting £10,000 per annum in rent. Your mortgage interest cost is £5,000 per annum which you deduct from your rental income to arrive at your profit for the year, being £5,000.

On this £5,000 profit a basic rate tax payer will pay £1,000 tax, a higher rate tax payer £2,000 and an additional rate tax payer £2,250.

How Will It Work in 2020-21

Using the example above you will now owe tax on the entire £10,000 rental income and receive a 20% tax credit for the £5,000 in interest = £1,000.

Therefore, a basic rate tax payer will still pay £1,000 tax (£2,000 less 20% credit of £1000), a higher rate tax payer £3,000 (£4,000 less £1,000) and an additional rate tax payer £3,500 (£4,500 less £1,000).

There are some knock-on effects to consider, in that the new profit calculation could push basic rate tax payers into the higher rate tax bracket. Higher rate tax payers, are also at risk of not making any money at all.

If you would like us to calculate your future position based on you current buy-to-let position, feel free to get in touch.