Landlords should get ready for another dip in rental profits as buy to let tax income tax rules bite harder from the start of the new financial year.
A year after the government changed the way how mortgage interest tax relief and rental business profits are calculated, the amount landlords paying higher rate tax can offset reduces again.
From April 6, these landlords can only deduct half their mortgage interest and other loan interest before paying tax.
So, if property business earns £20,000 in rent, but pays £9,000 in interest relief, a 20% basic rate taxpayer pays tax on profits of £11,000, which is £2,200.
For other taxpayers, the taxable profit is £15,500. A higher rate taxpayer hands HMRC £6,200, while an additional rate taxpayer has a bill of £6,975.
By 2020, every landlord will receive a 20% mortgage interest tax credit regardless of the rate that they pay income tax.
Next year, the mortgage interest relief offset will be cut by another 25%, and the same the following year, bringing landlords paying higher rate taxes in line with those paying at the basic rate.
How the changes affect landlord tax bills will become apparent between now and January 31, when the first self-assessment returns reflecting last year’s changes in mortgage interest relief are filed.
Not only are landlords paying tax at the highest rates likely to find they must pay more, but many basic rate landlords may find that their rental profits have pushed them into a higher tax bracket.
That’s because rental profits are now considered income and added to other earnings rather than as investment income.
In 2018-19, landlords in England and Wales can earn £46,350 before paying higher rate taxes. In Scotland, the threshold is £43,430 before 41% income tax is applied.