The gradual restriction of tax relief for buy-to-let mortgage interest has received much publicity since the process commenced 5 April 2017. From that date, tax relief is converted from a straight forward deduction against business profits into a basic rate tax deduction.
If you continue to be a basic rate taxpayer as these changes roll-out, you will see no increase in your income tax liabilities. You may see an increase if you are, or become, a higher rate or additional rate income tax payer.
The changes have and will occur as follows:
- 2017-18, relief for 75% of interest costs was given by deduction from rents, the remaining 25% given as a basic rate tax deduction.
- 2018-19, relief will be given on 50% by deduction from rents and 50% as a basic rate tax deduction.
- 2019-20, relief will be given on 25% by deduction from rents and 75% as a basic rate tax deduction.
- 2020-21, and from then on, relief will be given on 100% of interest payments as a basic rate tax deduction.
Buy-to-let landlords need to quantify how these changes will impact their income tax liabilities in the coming years and we can help.
A final planning note, it is possible to borrow money by extending the mortgage on your own home. This makes sense from a cost saving point of view as the arrangement costs of the re-mortgage will likely be less as will the rate of interest charged. However, be sure to take the following into account:
- You will be allowed tax relief on interest on loans up to the value of the property when it was first let, and
- The mortgage will likely be secured against your home and the funds to repay the mortgage (or part of it) will come from letting income. This means that if the rental income dries up, and you are unable to sell the rental property to clear the additional loan, you may be faced with selling your home.
Planning is a must-do for prospective, and existing, buy-to-let landlords. There are no short-cuts. Creating a well rounded business plan that considers the tax changes highlighted above are a prerequisite to achieving success in your property business.