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Buy-to-let Tax Changes – Starting from April 2017

April is just a month or so away and it marks the date for a major shift in tax planning for landlords. Tax relief is soon to be capped on a phased-in approach between 2017 and 2020. How will it affect the profits of your rental property? Will it still be feasible to keep it as an investment?

This article does not constitute advice. Professional advice should be taken prior to acting on any part of it. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it. 

From April 2017 – the new tax relief

Currently, landlords can claim tax relief on mortgage interest at the maximum rate of tax they pay.

For example, if you are a higher rate tax payer for your dental or medical business, then you will most likely pay tax at higher rate for your rental property as well. Now you can claim tax relief on the mortgage interest at higher rate too, meaning that you only pay tax on your profits.

However, from April 2020, tax relief on mortgage interest will only be allowable at 20%, the basic rate. Even though your rental income will still be taxed at the higher rate of tax.

From April 2017 the process starts of introducing this new tax system. It is essential that you understand the implication on your rental property to ensure it is still a feasible investment.

How will the new rules affect you?

If you don’t have a mortgage on your rental property, or properties, then you won’t be affected. To this effect, very wealthy landlords will be able to continue their buy-to-let business as usual.

If you have a mortgage and you are a higher rate, or top rate, tax payer, then you will invariably see increases to your tax.

Tax payable could rise by twofold, or more and in some cases, all the existing profit could become due in tax.

If you have a mortgage and you are a basic rate tax payer, you could also be affected.

In some cases, calculations show that the reduction in tax relief could push your rental profits above the tax threshold, which could make the investment financially unviable.

What can you do, practically?

There are a few options and things you can do practically to prepare.

Work out your new profit

Use our Buy-to-Let Tax Calculator to work out your new profit and to check how much you will be affected by the new tax rules.

Pay off your mortgage

If you have a large amount in savings, you could consider paying off the mortgage on your rental property early. This off course depends on things like redemption penalties. However, if you are due to remortgage in the next year or two, then you could build a plan around making small overpayments in line with your mortgage terms & conditions in the short-term with a view to making a larger payment to reduce, or clear, the mortgage before 2020.

Speak to a mortgage adviser to get advice on timing.

Consider selling – get advice first

Some landlords are planning to sell their rental properties as it isn’t feasible to keep it under the new rules.

Before you take drastic measures, speak to a financial adviser to ensure you have covered all grounds.

They can look at your property portfolio, your mortgage and your other investments and give advice on your best options.

Discuss your buy-to-let mortgage with Chris

If you would like us to undertake a review of your mortgage, Chris can help outline your options. Call today:


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