Update on the changes affecting Buy to Let tax relief
27 July 2015 •
The July 2015 Budget introduced several changes that could affect many landlords owning and renting residential property in the UK, below is a summary.
The key changes included
- The restriction of relief for mortgage interest from 2017/18.
- Abolishing the wear and tear allowance from April 2016.
- The increasing the rent-a-room relief to £7,500 from 2016/17.
Perhaps the most significant of these changes is the restriction in the mortgage interest relief to the basic rate of income tax. This restriction is being phased in over four years as shown in the below table.
| Tax Year |
Interest eligible for full deduction |
Interest restricted to basic rate relief |
| 2017/18 |
75% |
25% |
| 2018/19 |
50% |
50% |
| 2019/20 |
25% |
75% |
| 2020/21 |
0% |
100% |
Tax effect of the change
To illustrate the mechanism by which the tax relief will be restricted please see the below example of a higher rate tax payer who receives rental income of £10,000 and the only other rental cost being interest of £8,000.
| Rent |
£10,000 |
| Less: Interest eligible for full relief (£8,000 at 75%) |
£(6,000) |
| Property income |
£4,000 |
| Taxed at 40% |
£1,600 |
| Less: restricted interest relief (£8,000 x 25% x 20%) |
£(400) |
| Tax due |
£1,200 |
Previously the tax due would be based on the net figure of £2,000 which at 40% is £800.
Advice
From the above calculation it is clear that this will have a sizable effect on the tax due for a number of landlords especially when the restriction is fully implemented.
Given that the change is being phased in it is important to check the exposure and plan to mitigate any potential tax increase.
If you would like to discuss the above or any other tax matter please contact us at Warrener Stewart, you can also download our updated 2015 / 2016 tax card.