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Higher rate tax relief for buy-to-let landlords now completely phased out Higher rate tax relief on finance costs (such as mortgage interest) for landlords who own residential (buy-to-let) properties has now been completely phased out. Tax relief for landlords who are higher rate tax payers has been gradually phased out over the last three years and from April 6th 2020 is now restricted to the basic rate of tax – currently 20%. Therefore, landlords can no longer deduct all their finance costs from their rental property income before they calculate their profit. Instead, they can now only receive a basic rate reduction from their income tax liability for their finance costs. This affects landlords who let residential properties as an individual, changing how they receive relief for interest and other finance costs. It does not apply to companies. Neither does it affect owners of furnished holiday lets. Higher rate taxpayers will be affected Clearly, this changes how tax is paid for higher rate taxpayers. From April 6th 2020, all finance costs, including loan interest, is no longer an allowable expense when calculating rental profit. Instead, taxpayers receive a basic rate (20%) tax deduction after the rental profit has been taxed of up to 20% of the finance cost which includes loan interest, fees and legal costs and valuation fees. Some investors will not be affected International investors who do not earn any other income in the UK will be mostly unaffected. Only investors that have a large portfolio of rental properties which brings their UK income into the higher rate tax bracket will fall into this category. Typically, they will need a portfolio of at least three or four rental properties to generate this level of income but of course they will need to consult their accountant to calculate this figure exactly, depending on their portfolio. Neither does the move affect investors who own their rental properties within a company structure. Instead these investors pay Corporation Tax which is currently 19%. For more information on setting up a company to own buy-to-let properties, visit our blog where we discuss the pros and cons of such a move. Clearly, property owners who do not have a loan or mortgage will not be affected. Buy-to-let investors who will need to take specialist advice Those who are affected include investors with larger portfolios which put them into the higher rate tax bracket. Also affected are investors who have income from employment which takes their total income over the threshold to be a higher rate taxpayer. If this is the case, they will lose the previous higher rate tax relief on their finance costs. They will continue to receive full tax relief on other costs. If you are currently a basic rate taxpayer, this change in the way that the tax on rental income is calculated may push you into the higher rate tax bracket and you will find that your total income tax bill will increase. Tax Relief explained
|2019 - 2020 Tax Year||2020 - 2021 Tax Year|
|Estimated gross annual rental income||25,000.00||25,000.00|
|Loan interest Expense (Assuming interest of £3,000. 25% is allowable as an expense in 2019/2020)||750.00||-|
|Estimated net rental income||14,250.00||15,000.00|
|Annual Income Tax (20%)||2,850.00||3,000.00|
|Interest Relief (Assuming interest of £3,000)||450.00||600.00|
|Adjusted Income Tax Relief||2,400.00||2,400.00|
|2019 - 2020 Tax Year||2020 - 2021 Tax Year|
|Estimated gross annual rental income||62,000.00||62,000.00|
|Loan interest Expense (Assuming interest of £10,000. 25% is allowable as an expense in 2019/2020)||2,500.00||-|
|Estimated net rental income||37,500.00||40,000.00|
|Annual Income Tax (20%)||7,500.00||7,500.00|
|Annual Income Tax (40%)||-||1,000.00|
|Total income Tax||7,500.00||8,500.00|
|Interest Relief (Assuming interest of £10,000)||1,500.00||2,000.00|
|Adjusted Income Tax Relief||6,000.00||6,500.00|