What do new tax changes for Buy to Let mean to your cashflow?

There is a lot of fact full heavy information regarding the new tax changes available online, we hope our guide to changes hopefully makes things a lot clearer.

At present rental income tax has been calculated on the gross rental income minus the allowable expenses including mortgage interest, council tax, ground rent.

However from April 2017 this all changes and you will no longer be able to claim your mortgage interest in full as an expense. The good news is that this is being phased in over the next 4 years, meaning that the reduction in mortgage interest allowance is going to be as follows: 25% in 2017-18, 50% in 2018-19, 75% in 2019-20, 100% thereafter.

Dependant on your personal circumstances, you may end up being pushed into the higher rate of tax after your rental income and employment incomes are combined.

Let’s look at an example:

You own a three bedroom property in the Greater West London area. The property is worth £340,000. You currently have a mortgage of £255,000 at 75% loan to value (4% interest only) and your monthly payments are £850. You are achieving a monthly rental income of £1400. You are currently earning an annual salary of £25,000

As you can see the amount of tax you need to pay doesn’t change that much over the next few years. However, for example say you now have a pay rise from £25,000 to £30,000 you will end up being pushed into the higher tax bracket meaning you would have to pay 40% tax, a big jump in taxes.

Look at the numbers now.

It is a staggering jump, practically your entire pay rise wiped out, or rental income significantly reduced, however you look at it, it is a loss.

On our website, we have a free Buy to Let Tax Calculator to download which can help you work out the following:

  • Taxable income presently
  • Taxable income from 2020
  • How the new tax rate affects you
  • The total costs of the tax increases

This will most definitely hit some landlords in the pocket that are on higher incomes, and some smaller investors may find themselves less off and in extreme cases have any income from a property wiped out by the new tax rules.

Some individuals are changing their strategy or already have done so and buying through a company instead. It is important to understand that not everybody will need to set up a SPV, and we will always assess everything on a case by case basis.

If you think you may be affected, or would like more information, you can find out more about setting up a SPVs here with Intuitive Heights.