If it wasn’t such a serious issue, we’d shake our heads in disbelief at Chancellor George Osborne’s planned changes to Mortgage Interest Relief. From 2020, tax will be calculated based on rental income, not on profit. Buy-to-let landlords who have been able to use the interest on their mortgage to offset their tax bill will, in future, find this relief restricted to the basic rate of tax. Coming on top of changes to buy-to-let stamp duty, this is a harsh blow for many private landlords. Effectively, it means you could end up paying tax on non-existent income, and that is, quite simply, madness.
Crunching the numbers
If you have a rental income of £10,000 and mortgage interest costs of £6,000, here’s how the changes will affect you if you pay tax at the 40 per cent rate.
You will pay tax on your net income of £4,000 at 40%. HMRC will receive £1,600 and you will keep £2,400.
You will pay tax on your rental income of £10,000 at 40% but will get mortgage interest relief at the basic 20% rate (£6,000 @ 20 per cent = £1,200). HMRC will receive £2,800 (£4,000 less £1,200) and you will keep £1,200. Your net income has just been halved.
The figures are scary. It’s easy to see how any profit you make from renting a property could disappear. Something as simple as the end of a fixed-rate mortgage deal could mean that you make a loss. Even worse, you could make a loss and still have a tax bill!
With many landlords supplementing their employment income or saving for their pensions with a mortgaged property, this tax change is hard hitting. Even if you don’t pay tax at the higher rate currently, the changes may push your income into the higher rate bracket. In fact, the only investors who the changes won’t affect are those wealthy individuals who don’t need a mortgage.
The wider implications
These changes will be phased in, but they will start to bite from April 2017. It’s not yet clear how they will affect the rental property market. As people start to understand the effect on their finances they will face tough decisions. Rents are already at levels that many find unaffordable and there is little that can be done to protect landlord’s incomes other than cutting costs. The consequences could be poorer standards for tenants and potential evictions of those who cannot afford to pay more. Some property owners may decide to leave the business altogether. Why have the hassle if the reward isn’t there?
This tax change was introduced without consultation, but could have a huge impact on the supply of good-quality private-sector housing. Many in the industry and those concerned with human rights are campaigning against it. Some commentators have predicted it’s the death of buy-to-let, but that, to us, sounds defeatist. This tax change is bonkers and baffling, but U-turns have happened in the past. Take a few minutes to work out the impact on your income and then join the campaign.
We’d love to hear your views on the changes. Call us on 0333 577 9050 anytime.