Investment Landlord Tips Regulation

A Taxing Time

Written by Sarah Walker

The government’s phased withdrawal of mortgage interest as an ‘allowable expense’ kicks in for this year’s tax return, so how will your profits be affected over the next few years?

Until 2017/18, landlords were able to simply deduct the cost of their buy to let borrowing (the interest portion of their mortgage) from their rental income, saving higher-rate landlords – particularly those with a profitable portfolio – a significant amount of tax.

But this year’s tax return (for the year 2017/18) is the first that will reflect the phasing out of this ‘allowable expense’, which is being replaced by a reduction in tax liability. While it won’t make any difference to basic-rate tax payers, if you’re in the 40% or 45% bands, you’re going to feel some pain. In recognition of this, the government very kindly (!) decided to withdraw the allowance in stages.

So, on your tax return this year, 75% of the interest can be deducted from your rental income, with the remaining 25% subject to tax relief at the basic rate of 20%. For 2018/19 it’ll be 50% in each pile; for 2019/20 just 25% of the interest can be deducted as an expense, with the 20% relief applied to 75% of your annual interest. Then in 2020/21, you’ll only get 20% relief on the whole mortgage interest figure.

Let’s see what that looks like in real terms.

Take a landlord in a 40% tax band who has just one property that’s rented out for £1,000pcm, with a monthly mortgage interest payment of £400.  The figures below illustrate the difference between the profit they’d realise in 2016/17 versus 2020/21.

In this case, the landlord will see their profits fall by a third unless they can raise rents and reduce costs to cover their increased tax liability.

So, if you’re currently paying tax at 40% or 45%, make sure you’ve planned ahead and calculated what the loss of this deductible allowance will mean for you over the next 3 years’ tax returns. Most importantly, will your investment still be profitable?

The government argues that this new system makes it fairer, as it means those with higher incomes ‘no longer receive the most generous tax treatment’. But it’s not really fair, because it’s scuppering a heck of a lot of landlords’ business models, particularly in the case of HMO portfolio landlords who have made a long-term investment based on a tax regime that’s now being pulled.

As one HMO investor from Northampton put it: “A great number of us entered the market having to use someone else’s money (from a joint venture, mortgage company, bank, etc.) and one of the cornerstones of our business model – which we’ve built our financial future on – was that mortgage interest was an allowable expense against the business before tax. By removing this, the Chancellor has put a lot of landlords at a huge financial risk. It also seems very unfair that the rules have changed when we have already committed to a long-term funding agreement.”

And he’s right. Yes, laws change, but this kind of retrospective invalidation of so many people’s financial business models is bound to have a seriously negative impact which, for some, could be devastating.

See full details of the legislation at GOV.UK



About the author

Sarah Walker

Sarah Walker is a freelance writer and editor with extensive knowledge of the property investment industry.

A former estate agent and television presenter, Sarah has spent over a decade writing for industry publications and leading UK property companies, producing a wide range of marketing and PR content, including consumer guides, newsletters, website copy, articles and reports.

She has ghostwritten a number of property investment books, edited several others on property, business and branding, and continues to work with entrepreneurs to produce literature that supports their business enterprises. Sarah has been both a landlord and a tenant herself and has invested in the UK and overseas.

Away from her laptop, she’s a keen photographer and loves exploring the Scottish Highlands. Skiing is her sporting passion and she’s an enthusiastic member of her local amateur dramatic society.

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