Buy-to-Let Tax Changes on Finance: Four Year Implementation
Tax Changes for Landlords
Giving you a headache?
From this current tax year of 2017, changes to tax relief on finance charges for buy to let mortgages are being phased in until in 2020. From 2020 the buy to let tax changes mean that all finance will only be eligible for 20% tax relief after pre-tax profits have been calculated. The changes are being phased in from the current tax year and details are set out below. Make sure that you change your accounting systems and spreadsheets to take the changes into account.
Buy to Let Tax Changes Phases:
2017-2018 20% relief calculated on 25% of finance costs after pre-tax profits calculated, 75% still eligible for full tax relief
2018-2019 20% relief calculated on 50% of finance costs after pre-tax profits calculated, 50% still eligible for full tax relief
2019-2020 20% relief calculated on 75% of finance costs after pre-tax profits calculated, 25% still eligible for full tax relief
2020 onwards relief 20% calculated on 100% of finance costs after pre-tax profits calculated, all finance moves over to the 20% tax relief only.
Implications for Landlords
Lower Rate Tax Payer
For landlords who pay 20% tax on their income the buy to let tax changes will make no change to the amount of tax paid unless you are pushed into the higher rate tax band due to the way the accounting changes. Previously tax relief was accounted for prior to working out profits but with the changes the finance tax relief is not calculated until afterwards. See my videos on YouTube for how this works.
If you are pushed over into the 40% tax band you only pay 40% tax on income over and above the threshold which the current government is increasing. The threshold increases will protect many from being pushed into the higher band, thankfully.
Higher Rate Tax Payer
For landlords who pay 40% tax, you will be paying more tax overall from the current tax year, although you too will benefit from the higher rate tax threshold being increased. The overall tax burden will increase year on year as the changes are phased in so it will pay to do your calculations now. These buy to let tax changes are obviously not popular but all attempts at getting the government to reverse them have failed thus far so it looks like they are here to stay.
More information on tax and so much more in my book: Buy to Let: 7 steps to successful investing