Good question as George Osborne seems to have it in for Private Landlords and the Private Rental Sector in general; just when we thought that Private Landlords were providing nearly a 5th of all housing in the UK – George wants to make this sector unattractive to growth.
There are many reasons why you may choose to be a Landlord. You may have inherited property which lends itself to being rented out and gives you an income after your expenses. You may be what is termed an “Accidental Landlord” where you cannot sell your property and the only thing to do with it is to let it out so that it covers the expenses of still owning it. You may choose to be a Landlord because your pension prospects are looking a little dim and you see a rental income being beneficial to supplement your pension. Or you may be a Portfolio Landlord or Property Business where your rental properties are your livelihood as well as your investment. So as you can see there are may reasons why anyone becomes a Landlord, some with just one property and some with hundreds of properties.
Now George has waded in and started Landlord bashing and seeing a possible “Cash Cow” ready for “milking”. He has announced that mortgage interest relief for individual residential landlords will be restricted to the basic rate of income tax. This will be staged, beginning from 2017.
The new rules will be introduced gradually over a three year period starting from 6 April 2017, and relief will be available as follows:
- In 2017/18, the deduction from property income will be restricted to 75% of the finance costs incurred, with the remaining 25% being available as a basic rate reduction.
- In 2018/19, 50% of the finance costs will be given as deduction and the remaining 50% will be given as a basic rate reduction.
- In 2019/20, 25% of the finance costs will be given as deduction and the remaining 75% will be given as a basic rate reduction.
(Figures from RLA)
Here are some sums to explain:
Your buy-to-let earns £20,000 a year and the interest-only mortgage costs £13,000 a year. Tax is due on the difference or profit. So you pay tax on £7,000, meaning £2,800 for HMRC and £4,200 for you.
Tax is now due on your full rental income of £20,000, less a tax credit equivalent to basic-rate tax on the interest. So you pay 40pc tax on £20,000 (ie £8,000), less the 20pc credit (20pc of £13,000 = £2,600), meaning £5,400 for HMRC and £1,600 for you. Your tax bill has therefore gone up by 93pc.
Now, say Bank Rate – and in turn your mortgage rate – rises by a small fraction, lifting your mortgage cost to £15,000, while your rent remains at £20,000.
You will have to pay £5,000 tax in this scenario, so you make no profit at all.”