UK landlords have had to endure some changes in recent years. Just 12 months ago, they were hit with an increase in tax on second homes and investment properties.The changes show now sign of slowing down as they have now been hit with tax changes that will affect their profits.
From 6th April, tax relief for buy to let landlords in the UK is being phased out. The introduction was first announced in the 2015 Budget. Since then, there have been many campaigns for the government to reconsider but the implementation has gone ahead.
The changes will affect landlords who have a mortgage for their UK or overseas residential rental property. These landlords will no longer be able to fully claim tax relief on their mortgage interest payments. The reduction of tax relief will be gradually phased in over the next four years.
Before the change, landlords could deduct mortgage interest payments and allowable expenses from their rental income and pay tax on the difference. Now, landlords will only be able to claim basic rate of 20 per cent tax relief on whichever figure is lower:
- Finance costs: mortgage interest payments, loan repayments, overdrafts
- Profit from your rental income: calculated as rental income less allowable expenses
- Total income: anything other than savings and dividend income above the personal allowance after deducting losses and tax relief
The changes will be phased in until April 2021. The table below shows how it will be introduced:
|% of finance costs given as:|
|Tax year ending:||Rental expense||20% tax deduction|
|5 April 2017||100%||0%|
|5 April 2018||75%||25%|
|5 April 2019||50%||50%|
|5 April 2020||25%||75%|
|5 April 2021||0%||100%|
The government hopes that the change will make buy-to-let less appealing and lower its profitability. It will undoubtedly affect profits unless the costs are passed on to tenants.
With expenses rising and cuts to relief, landlords need to ensure that their money isn’t wasted elsewhere. Tenant disputes can lead to landlords paying for repairs when the responsibility in truth lies with the tenant.
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