Cherie Booth QC yesterday represented two landlords at a hearing where they were seeking permission to bring a judicial review application. The landlords wanted to prevent the government bringing in proposed tax changes in relation to buy to let properties.
What is the current income tax position?
Currently, tax is payable on landlords’ net rental income after deducting allowable expenses including mortgage interest.
What is changing?
The Summer Budget 2015 set out changes to the amount of tax relief that is available for interest on buy to let mortgages.
Landlords will no longer be able to deduct all of their mortgage interest from their rental income to arrive at their property profits. They will instead receive a basic rate reduction (ie 20%) from their income tax liability for their finance costs.
What does this mean for higher rate taxpayers?
The changes will mean that the amount of tax that a higher rate paying landlord will pay will increase dramatically. Here’s an example where the landlord pays tax at the higher rate (40%):
2016 – the property earns £20,000 in rent and the interest-only mortgage costs £13,000. Tax is due on the £7,000 profit: this means £2,800 to HMRC and £4,200 to the landlord.
2020 – the landlord will pay 40% tax on £20,000 (£8,000), less the 20% tax credit on the interest of £13,000 (£2,600). This means that HMRC will get £5,400 and the landlord gets £1,600.
What about those paying at the basic rate?
The end result will be that most lower rate-paying landlords will pay the same amount of tax after the changes come in.
However, the new rules change the way that income is calculated. Using the same figures as above, currently the landlord’s income is £7,000 (rent income minus mortgage interest). When the changes come in, the landlord’s income will be £20,000. This could have an effect on the landlord’s income tax bracket, taking him from 20% to 40%, and could also affect claims for Child Benefit and Income Tax Credits.
When do the changes come in to force?
The main changes will kick in in April 2020, but there are transitional provisions, meaning that rates will start changing as soon as April 2017.
What happened at Court?
With the stamp duty changes earlier this year, landlords are understandably frustrated by the impending tax increases, which do not affect companies. The two landlords who appeared in Court yesterday, argued that the new tax regime will be detrimental to landlords and the housing market and discriminates against individual landlords. Mr Justice Dingemans decided that the law was not discriminatory and did not unfairly favour corporations above individuals. So for now at least, it looks like these changes will be coming into force shortly.
Do you own a buy to let property and are concerned about the new tax regime, or are thinking about buying a buy to let property? Contact our residential conveyancing department on 0113 244 9931.
