The controversial Buy-to-Let tax is currently progressing through Parliament as part of the Finance Bill. Here are three facts you may not know …
Fact 1- The Buy-to-Let tax will be phased in between 2017 and 2020, and effectively removes the ability of private landlords to offset the cost of their mortgage interest before arriving at a taxable profit.
Currently landlords can claim relief on the interest they pay on their mortgage to offset their tax bill. This new Buy-to-Let tax means that landlords will no longer be able to offset the cost of their mortgage interest from their rental income when calculating a profit on which to pay tax.
So, rather than paying tax on what is left of the rent after the mortgage interest has been paid, tax will be payable on all the rent received.
Previously, landlords paying higher (40%) or additional (45%) rate tax could claim tax relief at their highest rate, but this new tax means that relief can only be reclaimed at the basic rate (20%), whatever rate of tax the landlord pays.
Landlords who only pay basic rate tax, shouldn’t be affected by the change, although industry commentators say that some basic-rate taxpayers could be also be hit, because the change will force them into the higher-rate tax bracket.
According to accountancy firm Smith & Williamson, any higher-rate taxpayer landlord whose mortgage interest is 75% or more of their rental income, net of other expenses, will see all of their returns wiped out within five years time.
“Unfair and unreasonable”
A recent article in The Telegraph newspaper reported that the Institute of Chartered Accountants in England & Wales (ICAEW) has attacked this new tax on buy-to-let.
The ICAEW said that the Chancellor has implemented the tax to “create a more level playing field” between property investors and owner-occupiers who do not enjoy tax relief on interest payments.
They say, however, that the tax - which will apply to both new investments and existing buy-to-let properties – is “unfair and unreasonable”.
They added: “Taxpayers will have priced and borrowed according to the tax relief they expected, and these borrowing decisions would necessarily have a long timeline. Many will not be able to restructure their debt.”
You can use this free Buy-to-Let calculator to see how the new tax reduces your profits here.
Fact 2 - The Buy-to-Let tax has found popularity among tenants, however it could heighten the property crisis and make it more difficult for first-time buyers.
This new tax could have an effect on many areas of the property market. Here are some examples:
- tenants could face rent hikes as landlords try to recoup some of their lost profits;
- many private landlords could leave the BTL market, potentially meaning tenants have to find somewhere new to live;
- buy to let investors who are cash buyers may increase the competition at the lower end of the property market. This could increase house prices and leave first time buyers having to save more in order to buy a home, as well as have less choice of properties;
- landlords may invest less in their properties, meaning the standards of accommodation could fall.
Buy-to-Let mortgage lenders, too, will be affected by the new tax. Lenders will have to judge affordability under the new measures, which will include confirming the tax bracket a prospective borrower falls into, as well as deciding whether the rental income from the property pushes them into a higher bracket, thereby rendering the loan less affordable.
Fact 3 - You can minimise the tax you have to pay by deducting certain "allowable expenses" from your taxable rental income.
You can minimise the tax you have to pay by deducting certain "allowable expenses" from your taxable rental income. Allowable expenses include:
- letting agents’ fees;
- legal and accountants’ fees;
- buildings and contents insurance;
- maintenance and repairs to the property (but not improvements);
- utility bills, like gas, water and electricity;
- rent, ground rent, service charges;
- services you pay for, like cleaning or gardening;
- other direct costs of letting the property, like phone calls, stationery and advertising.
Allowable expenses don’t include ‘capital expenditure’ - like buying a property or renovating it.
Finally, there is further bad news for landlords: the “wear-and-tear” allowance which allowed landlords to deduct 10% from their annual rental income before calculating their tax bill — whether or not they had spent any money doing up their rental properties – is being withdrawn from next April.
Then, only the cost of repairs landlords actually carry out will be deductible and owners will have to keep receipts in case they are asked for proof of the works.