Buy-to-let tax changes | Mortgage interest relief.
- From 2020, landlords will no longer be able to deduct the cost of their mortgage interest from their rental income when they calculate the tax due.
- So tax will be paid on turnover rather than profit, meaning tax could be due on non-existent income.
- For higher-rate taxpayers, mortgage costs above 75pc of rental income will make their BTL investments loss-making.
- Mortgage interest relief will be restricted to 20pc, meaning that higher and additional-rate taxpayers will be particularly affected.
Example: Landlord pays 40pc tax
Now your BTL earns £20,000 a year and the interest-only mortgage costs £13,000. Tax is due on the profit. You pay tax on £7,000, meaning £2,800 for HMRC and £4,200 for you.
From 2020 tax is due on your full rental income of £20,000, less a tax credit equivalent to basic-rate tax on the interest.
You pay 40pc tax on £20,000 (£8,000), less the 20pc credit (20pc of £13,000 = £2,600).
HMRC gets £5,400 and you get £1,600. Your tax bill has gone up by 93pc.
Find out how we can help you with our Accountancy services
Author: Elaine Walker