New UK Buy to Let Tax law – How Much Will it cost you?

By SUPER USER | 11th Nov 2015 | Property News

The UK property market is still reeling from the Chancellor of the Exchequer George Osborne’s budget announcement of 8th July 2015 relating to interest relief on buy to let property mortgages.

The UK Treasury are making changes to a tax system which current favours private landlords where the wealthiest could receive tax relief of up to 45p per £1 directly from the taxpayer. The move is very controversial as it’s been decided without consultation and was not a part of the Conservative Party Manifesto for the 2015 General Elections.

It’s important to emphasise that these changes apply to private landlords only and not to companies that operate with buy to let mortgages. Also landlords with mortgages for holiday buy to lets won’t be affected; it’s only properties with permanent tenants that will be applicable.

Unsurprisingly the new taxation changes have been particularly unpopular with landlords and there are many appeals/petitions underway. The Daily Telegraph in particular is leading a campaign to “axe the buy to let tax grab”.

How does Mortgage Interest Relief currently work?

The current system is quite straightforward. For a property where current rental income is £12,000 per year, mortgage interest costs are £7,000 per year then the taxable income would be £5,000.

The amount of tax paid depends on the tax band of the landlord and would be £1,000 (lower rate band), £2,000 (higher rate band) and £2,250 (additional rate band).

How are the tax rules changing?

Over three tax years starting from 2017 the amount that landlords can claim in mortgage interest relief will change. Under the new plans landlords won’t be able to deduct the full mortgage interest. Instead landlords will be entitled to claim a tax credit of 20%.

Working the example above, the rental income would be £12,000; tax credit would be £1,400 (20% of £7,000). The tax payable would be £1,000 (20% of £12,000) – £1,400, the same as above.

The picture is far different for medium rate tax payers though. The medium band would pay £3,400 (40% of £12,000) – £1,400. This is a 70% increase in tax burden (£2,000 rises to £3,400). For additional rate tax payers the tax rises from £2,250 to £4,000 (a 78% rise).

Why are the UK government implementing these changes?

So why are the UK government implementing this?:

  • To level the imbalance that exists between residential buyers (mortgage interest relief was abolished in 2000 for residential buyers) and landlords on mortgage
  • interest relief – UK Government quote –

“We’re committed to creating a more level playing field for those who are buying a home to live in and are taking action to ensure that landlords with the largest incomes no longer receive the most generous tax treatment.”

  • To earn more taxation revenue! Whatever the government say a prime motivator is to earn more revenue
  • By making buy to let investments less attractive and less profitable the government hopes:

There will be less competition for first time buyers for properties

There will be lower price inflation in the UK and London property market

Rising rents, property slash sales, reduced profits

There are many implications of the tax changes, these include rising rents, slash sales of property by private landlords and reduced profits for private landlords:

  • Rising rents – Rents will rise in a number of ways:
    • Private landlords retaining properties will increase rents to make a return on their property
    • Private landlords selling properties will cause a lower stock of rental properties to the market (potentially) in doing so the law of supply and demand will increase rental prices
  • Slash sales of properties – Many landlords will decide that buy to let property investment is a business that’s not for them and there will be slash sales of properties, there is evidence that this process has already started
  • Reduced profit for private landlords – Naturally the tax burden will reduce the profitability of buy to let for landlords

What are implications of the new changes?

In a nutshell the following are a list of the changes that the new tax legislation will bring:

  • Fully implemented by the year 2020, private landlords will no longer be able to deduct interest costs from mortgages off their rental income. The new regulations will apply a 20% mortgage interest tax credit instead
  • Landlords who pay higher rates of tax will definitely pay more taxation
  • Cash rich landlords with no mortgages will be unaffected by the changes
  • Companies are exempt from the changes so many private landlords may convert to a Company structure instead
  • Some landlords will even pay taxes when incurring losses
  • Many current basic rate tax payers will move into the higher rate tax band due to the changes, even though their income doesn’t change
  • Additionally a proportion of landlords will consequentially face benefit reductions on pension tax relief and also possibly for child benefit