Question: What's all this about limiting my ability to offset my mortgage costs against the income from my buy-to-let property? That was one of the reasons I bought the place. What will the effects be — and will they hit me immediately?
Answer: Landlords have been able to offset all the costs of finance — ie mortgage interest — against the rental income from buy-to-let properties, cutting the amount of their net rental profit that is subject to income tax.
However, following the summer Budget, this treatment will be phased out gradually from next year, with the effect that by 2020, landlords will only be entitled to basic rate tax relief in respect of mortgage interest.
Crucially, the 20 per cent relief will not be a deduction, but will instead be a "tax credit". For a higher-rate taxpayer this results in the loss, not only in tax relief of up to 40 per cent, but also in the possibility of using finance costs to create or increase a loss for the rental business. Starting from next year, the deduction of finance costs will be limited to 75 per cent with the remaining 25 per cent subject to the restricted 20 per cent credit system.
Higher-rate relief will then be withdrawn in tranches of 25 per cent each tax year, ending with only the basic rate credit available in 2020/2021.
Here is an example of the sums for 2017/2018: if your rental income is £10,000 and the cost of the finance is £1,000, 75 per cent (£750) is deductible. A 20 per cent credit is given with regard to the remaining 25 per cent — so of £250 that would be £50. So, that's £750 deductible and £9,250 taxable at the landlord's applicable income tax rate, with a basic rate tax credit of £50.
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We regret that questions cannot be answered individually, but we will try to feature them here. Fiona McNulty is a legal director in the private wealth group of Foot Anstey.