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With George Osborne's tax changes announced in his 2015 budget now starting to take effect, it's worth taking a look at the incepted changes and how they are beginning to impact landlords now. There is a gradual tapering down of mortgage interest relief for personally held buy to let mortgages which begun in April 2017 and the full impact will hit landlords in 2020, when tax relief will be limited to basic rate tax only for mortgage interest payments on personally owned buy to let properties.
Well currently, similarly to any business if you incur business expenses they reduce your profit and you only pay tax on those profits, therefore any interest you incur on personally held buy to let mortgages once enjoyed tax relief at your current rate of taxation. That's the same for any legitimate business expense regardless of the business.
Dubbed a "Tax on Turnover" the rules now incepted remove that so called 'tax benefit' and limit the amount that can be mitigated.
So at a very basic level in accounting terms, as a landlord your turnover is made up of your total rent receipts throughout the tax year and usually all your costs including mortgage interest payments will be deducted, to determine your profits and in turn individual tax rate.
However now, your mortgage interest as a cost is initially set aside, and you can only deduct the other costs to determine your rate of tax, so if you imagine you now have a much higher 'income' as your mortgage payments are being ignored.
Now if your turnover and mortgage payments are quite substantial or if you have income from other sources - this could have the effect of pushing you to a higher rate bracket, but with the ability to only claim back a minimal 20% tax credit on your mortgage interest payments as opposed to a higher 40 or even 45% should you be a higher rate taxpayer.
Do remember that the 20% basic rate cap doesn't come into effect until 2020, and so the effect on your tax bill will be gradual (a quarter of the eventual effect each year for 3 years from 2017) if you are indeed affected, but for those with heavily geared portfolios, it's highly likely that you will be significantly impacted, so we urge you to take tax advice asap.
Obviously for some with smaller portfolios your effective tax rate may well not change. But check with your accountant as if you have a main PAYE employment or a own shares in your own business, this could already have you in a higher tax bracket and therefore you are impacted by this new legislation. The quicker you appreciate the situation the more you can do to minimise the eventual impact.
Whether we agree with these tax changes or not, the best way to go forward is to make you aware of ways you can minimise the impact of any changes going forward as it's true to say that some, especially those with sizeable highly geared portfolios can be paying tax where there is no profit, which we have to admit is somewhat inconceivable.
The first thing to do is to take specific tax advice, a tax expert can give you tailored advice and help to apply any required changes in making you more tax efficient.
Here are some ideas to start the ball rolling;
Don't forget that changes to stamp duty in April 2016 need to also be considered when investing.
Feel free to talk to us about any of the options held here, all advice should be taken in tandem with specific taxation or legal advice.