Future-proof your buy to let
The taxation of income from residential let properties is changing, and you may need to alter the financing of your lettings business to ensure you are not left out of pocket.
Currently you can deduct all of the interest you pay on loans related to your lettings business from the income received, giving you effective relief for that interest at your marginal tax rate: 20%, 40% or 45%.
From 6 April 2017 individual landlords (not companies) will see the amount of interest they may deduct for tax purposes restricted to 75% of the amount paid. Your tax-deductible financing costs for your lettings business will be reduced further each year until 2020/21, when all financing costs will be blocked as a tax-deductible expense.
In place of the interest deduction you will get a credit against the tax due of 20% of the restricted amount of interest. Below is a simplified example of how the tax relief will work in 2020/21 compared to 2016/17 for a 40% taxpayer.
In 2020 your tax charge could almost double, depending on how much interest you pay out of your lettings business. The effect of this change will vary for different landlords, so we should discuss how it will affect you by crunching through the numbers for your business.
| 2016/17 | 2020/21 | |
|---|---|---|
| Gross rental income | £20,000 | £20,000 |
| Interest paid | 13,000 | *13,000 |
| Net actual profit | 7,000 | 7,000 |
| Taxable profit | 7,000 | 20,000 |
| Tax charge @40% | 2,800 | 8,000 |
| Tax credit 20% of interest | - | (2,600) |
| Cash in your hands | 4,200 | 1,600 |
| *not deductible | ||