Everybody seems to be talking about mortgage interest relief recently. A lot of people believe this to be just another tax that won’t really impact their bottom line. For those landlords who own their property outright, with no mortgage, this change will not make any difference to the way they run their portfolio. However, for those landlords who have mortgages on their properties, they will see a big rise in their tax bill and a big chunk of their profits will likely go. The landlords who fall into the highest rate tax bracket of 45% will be hit the hardest.
It is important to note that your income will be judged including the disallowed finance costs. This artificial increase in your income could in some cases push you into a higher rate tax bracket. Therefore even base rate tax payers can be adversely affected.
Section 24 was introduced in April 2017 and has gradually been phased in over the last few years. With the introduction of this new tax landlords will no longer be able to claim mortgage interest, or any other property finance, as tax deductible. Instead, rental profit will be taxed with a maximum deduction for finance costs of 20%, the basic tax rate, by 2021.
Will Section 24 Actually Affect Me?
If you have any kind of loan or mortgage interest on your buy to let property, then yes. If it is a large proportion of your costs, you will now start to pay tax on those costs, as well as your profit. Use the calculator in the link below to determine your tax liability:
https://www.rla.org.uk/taxcentre/tax-calculator.shtml[/vc_column_text]
Are There Any Other Changes That Might Affect My Profits
Along with mortgage interest relief restriction, mortgage arrangement and broker fees will no longer be tax deductible.
From April 2016, the wear and tear allowance for all landlords was scrapped. Previously, if a property was rented furnished, HMRC would allow you to offset 10% against your net income each year, regardless of whether you replaced any items. Now, this will only be allowed if you replace furniture like for like, so be wary of only replacing furniture if it’s necessary.
What Can I Do To Limit The Effects On My Profits
Although we are 3 years into the 4 years phase in period, it’s never too late to make plans! There are a number of options available depending on your personal circumstances. My advice would be to speak to a property specialist accountant and/or a tax expert who will be able to explain how much higher your tax bill will be and if there is any way to minimise it.
Are you a tiring or retiring landlord and looking to sell a property? We can offer a guaranteed cash purchase for your property in a timescale that suits you. It could be a couple of weeks, or even just a few days. For landlords looking to sell off entire portfolios, large capital gains tax bills could await you. We are happy to work with you to structure the purchase of your properties in the most tax efficient manner.
