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More Changes on the Horizon for Landlords

More Changes on the Horizon for Landlords

Learn about the changes that will affect buy-to-let landlords from April 2020. This information will be of interest to those studying for CII exams on taxation, R03, R06, AF1 and AF5.

So last year, landlords took a blow when the ability to offset mortgage interest against rental income was reduced. Prior to April 2017, interest paid on mortgage loans could be completely set against rental income saving income tax at the taxpayer’s highest rate.

Being able to deduct mortgage interest costs made rental property as an investment a very attractive proposition – not least to pension savers over 55 who could access their pension funds in full.

From 2020, income tax relief will only be given at the basic rate.  At that time, this will cost a 40% taxpayer £80 for every £100 of mortgage interest they pay (rather than the £60 it cost when they got full tax relief).

The reductions are being phased in, and when they started in 2017, the percentage of interest that was deductible from rent was 75% (with the other 25% getting basic rate relief only).  From this April, the percentage will be 50% for both; in 2019 25% of finance costs can be deducted for full tax relief (with 75% being relieved at basic rate) and eventually from 2020 100% of interest will only receive tax relief at 20%.

Buy-to-let landlords will receive less tax relief from April 2020. Click To Tweet


An Example of How the Tax is Applied

Let’s look at an example of how it operates from April 2020 (we have assumed current tax rates/personal allowance for simplicity)

Mark has a gross salary of £40,000 and rental income of £20,000 per year.  The interest on the mortgage is £10,000 per year. 

Mark has a total income of £60,000.  £11,500 is taxed at 0%, the basic rate band of £33,500 is taxed at 20% (£6,700) and the remaining £15,000 is taxed at 40% (£6,000).  Total so far = £12,700.  The mortgage interest reduction is calculated as £10,000 x 20% (basic rate) which equals £2,000 which is deducted from the total, leaving Mark with a tax bill of £10,700.

Prior to 2017, Mark would have received 40% tax relief on the £10,000 meaning his tax bill would have been £2,000 less.

Remember this is the situation from 2020. From this April, he will still be able to claim higher rate relief on 50% of the interest he pays (with the other 50% relieved at basic rate).

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Alternatively, you can download taster resources for AF1, AF5 or R06 if one of those exams is stressing you out.