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A quick guide to tax changes for Landlords

There have been many tax changes for landlords to be aware of in recent times but as of April 2017, there has been a notable change that may seriously impact on many landlord’s income and ability to turn a profit.

As of the 6th of April 2017, changes have been implemented to the tax relief for finance costs, and by April 2020, this will be restricted to the basic rate for income tax, which is currently set at 20%. This relief will be provided as a reduction in the level of tax liability, as opposed to a reduction to the taxable rental income, and this may also have an impact on landlords.

The changes are being phased in over four financial years. The process started for the 2017/18 financial year with the split standing at 75% of finance costs which can be deducted from rental income and 25% of basic rate tax reduction. In 2018/19, this moves to 50%, 50% split between finance costs which can be deducted from rental income and basic tax rate reduction. In 2019/20, the balance comes in at 25% of finance costs which can be deducted from rental income and basic rate tax reduction and then from 2020/21, the system will be 100% of basic rate tax reduction.

Higher tax rate bracket landlords will be impacted on

For a landlord who is currently in the basic rate of tax band, and maintains that position after the changes, there will be no change to their circumstances. However, landlords who are in the 40% or 45% tax bracket, the changes will impact on their net profit from their buy-to-let activities.

As an example, a landlord who in 2016/17 had rental income of £10,000; a mortgage of £5,000 and costs of £2,000 had taxable income of £3,000. This led to a tax bill of £1,200 leaving the landlord with a profit of £1,800.

However, by 2020/21, and with income and costs being the same, there is a big drop off in the profit earned by the landlord. With rental income of £10,000 and costs of £2,000; the landlord has taxable income of £8,000. With 40% tax leading to a figure of £3,200 and then the mortgage interest rate (standing at 20%) standing at £1,000; the total tax bill for the year stands at £2,200; which sees the landlord making a profit of £800. This is £1,000 less than the profit earned in 2016/17 with all other things being equal.

This is not a drop-off that only happens in the final year, over the course of the relevant years, the landlord will make a smaller level of profit. With all other things being equal and the landlord making a net profit of £1,800 in 2016/17, the net profit figures for the other years would be as follows:

  • 2017/18 – Net profit of £1,550
  • 2018/19 – Net profit of £1,300
  • 2019/20 – Net profit of £1,050
  • 2020/21 – Net profit of £800

It is easy to see how this will impact on many landlords and it is essential that landlords work out their own figures and make sure they are comfortable with their expected returns.

Worried about how this will affect your portfolio? Book an appointment with one of our lettings experts.

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