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The End of Buy to Let Tax Relief

George Osborne left several gifts for landlords before vacating the treasury. The first has already come into force which is the increase in stamp duty for the purchase of a buy to let property. The second is a reduction of tax relief that landlords can claim against mortgages.

As it currently stands, say you’re rent is £10,000 a year and mortgage is £9,000 a year, you make a £1,000 profit. A basic rate tax payer would pay 20% (£200), higher rate 40% (£400) and top tier 45% (£450) to HMRC.

This is going to be reduced and for 2017/18 this will 75% of your mortgage interest that is tax deductable, 2018/19 50%, 2019/20 25% and from 2020 onwards 0% tax relief.

If we look at next year, that means of the £9,000 mortgage, you will be able to claim relief on £6,750 (75%) of your mortgage meaning £2,250 will be considered profits, so a total profit of £3,250. At a basic rate of income tax at 20%, that’s £450 tax to pay, at 40% it’s £900 and at 45% it’s £1,012.50 (which is technically a loss) to be paid to HMRC.

Of course, the above doesn’t take into account other deductable property expenditures, but as a basic guide, that’s the difference that it will make to you.

The only way of avoiding these tax increases is to place your property/properties into a limited company and then pay corporation tax of 20% on profits but still be able to claim 100% mortgage relief. Theresa May has said corporation tax will be reduced to 17% by 2020, so worth a look into if you’re a higher rate tax payer.

As always, it’s best to start planning your finances early rather than be caught out with a hefty tax bill you can’t cover. Crunch some numbers and be prepared!

Haydar Sehri's blog

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