Under the new rules that will come into force from April 2017, an estimated 440,000 buy-to-let landlords, who currently pay income tax at the basic rate of 20% will be pushed into the higher bracket of 40%.
Current regulations allow landlords to offset their mortgage interest against income tax. This means that a basic rate taxpayer would receive a 20% tax relief, those at a higher rate would receive 40% relief and top-rate taxpayers could claim 45%.
Last year the government announced that from April 2017 landlords will no longer be able to offset mortgage interest against their tax bill. Meaning tax relief will be at a flat rate of 20%, effectively halving the relief and reduce profits for landlords paying above basic rate taxes.
This change is part of a 3-year plan to phase out the current regulations and will result in landlords paying tax on their rental revenue and not just their profit, from the start of 2020.
Research from the National Landlords Association (NLA) has estimated close to half a million landlords could be affected by the new rules, with the average UK landlord owning a single property having to pay an extra £3,600 in tax.
The recent research has also shown the effects of this change by region showing central London feeling the affect the most, with approximately 31% of its landlords being pushed into a higher tax bracket and the East of England (30%) and the West Midlands (28%) not far behind.
NLA Chief Executive, Richard Lambert believes the government have underestimated the effects of this change, stating “When the Government announced these changes last year, it claimed they would only hit a small proportion of higher-rate tax payers. We now know that is complete tosh.”
This news won’t be welcomed by landlords as they’ve already had to deal with the blow caused by the increase in stamp duty and the changes to wear and tear tax.
Lambert went on to say that these rules should only apply those taking out a buy-to-let loan after the new rules are in place, Lambert said “Unless this happens, landlords will face an impossible decision of whether to increase rents and cause misery for their tenants, or to sell-up, and force their tenants to find a new home”
