How much do you stand to lose?
The proposed changes to the tax relief claimable on mortgage interest, as part of a buy-to-let property investment, is now a major cause for concern for property investors. Higher rate tax payers, plus certain basic rate tax payers, with rental properties and a mortgage, will be affected. This includes doctors and dentists, many of whom opt for a buy-to-let investment to support their retirement.
Everything seems against buy-to-let
With the Bank of England also planning to tighten their ship with buy-to-let mortgage lending, it appears everyone “has it in” for buy-to-let investment at the moment.
Angry investors have been writing to MP’s for a reconsideration of the proposed changes that, until further notice, will be enforced from April 2017.
Many doctors and dentists choose to invest in buy-to-let property as a means to supplement other retirement incomes. Will the offer not be as attractive now?
Who will be affected?
Anyone who currently pays income tax at the higher rate, so from dividends or salaries, or profits from self-employment, will almost certainly be affected.
The proposal the government are edging closer to a decision on, is to restrict the higher-rate tax relief on mortgage interest, which is typically the greatest expense to a buy-to-let property investor, and the one, where currently they gain the most tax relief.
Between 2017 and 2020/2021 the tax relief available to higher rate tax payers will be tapered off.
- April 2017 – higher rates can be claimed for 75% of mortgage interest costs
- April 2018 – higher rates can be claimed for 50% of mortgage interest costs
- April 2019 – higher rates can be claimed for 25% of mortgage interest costs
- April 2020 – only basic rate tax relief can be claimed
Some landlords paying just basic rate tax may become affected, if their inflated rental profits mean they cross the threshold into higher rate tax.
Cash buyers will be unaffected by the change as will companies, so it really is targeted at the “middle-range” property investors.
Read more: Buy-to-let investors face cuts in tax relief
What is the professional guidance?
Accountants and Financial Advisers are advising their clients initially to plan ahead, as there is at least some time to implement a strategy.
Many landlords will be looking to increase their rent to cover the loss of the tax relief, and some plan to do this in phases, starting soon, so it isn’t such a big hit to tenants, especially long-term loyal tenants.
Moving properties into a company structure is also an option for some landlords, however this needs to be carefully balanced with stamp duty and capital gains tax calculations.
Wealthy investors have the option to pay-off any mortgages with cash from other assets and avoid the higher tax charge.
Dental & Medical Financial Services are helping landlords to assess the best option for them taking into account the new legislation.
What do you stand to lose?
Use this online calculator to see how much you could stand to lose out if this legislation comes to fruition.
An simplified example case is as follows:
Now
Rental Income £20,000
Mortgage £13,000
Profit £ 7,000
Tax at 40% £ 2,800
For you £ 4,200
2020
Rental Income £20,000
Tax at 40% £ 8,000
Tax Credit £ 2,600 (based on 20 percent of mortgage)
Tax £ 5,400
For you £ 1,600
In this example, the tax bill increases by over 90% by 2020. A rise in the mortgage payment from £13,000 to £15,000 a year, would wipe out all profits.
THIS IS JUST A SAMPLE – FOR A BESPOKE CALCULATION PLEASE SEEK ADVICE FROM A FINANCIAL ADVISER
Dental & Medical Financial Services can help discuss your options with minimising tax on a buy-to-let investment, or if you are a potential investor, we can discuss viability. Contact our team today.