There have been several changes in the world of mortgages in recent months. Now another change looks set to have a serious effect on some landlords with buy-to-let properties and mortgages.
This is the tax relief currently given on buy-to-let mortgages. The idea is a landlord can currently claim tax relief on the interest they are paying on their mortgage. This is calculated at the same rate they currently pay in income tax. This essentially means landlords can take the amount of interest they pay on their mortgage payments off the amount they earn in rental income. The amount left is the amount they currently pay tax on.
However, this will not be the case when the new rules come into play. This may well lead some landlords to sell properties, purely because they may no longer be able to make a profit on them. In the worst-case scenario, some landlords may end up making a loss on one or more of the properties in their portfolio.
Tax on turnover rather than profit
At the moment, you pay tax at your designated rate against the profit you make from each property you have. When the new tax rules come in, you will no longer have the tax relief that currently exists. This means you will have to pay tax on the turnover each buy-to-let property creates.
There will be a tax credit on the interest paid on each mortgage, so this does temper the change somewhat. However, some landlords will find themselves paying a lot more tax than they do at the moment. It won’t be paid on the profit either. If a landlord brings in £25,000 from a single property, that won’t all be profit. Their mortgage charges could be £15,000, for example. That is a huge chunk out of the turnover – and yet the new tax rules mean every landlord will pay tax on the turnover (£25,000 in this example) rather than the profit (which would be £10,000 in this case – considerably lower).
Higher-rate taxpayers look set to be hit hardest
The figures may not work out too badly for those on the 20% rate of tax. However, if you happen to be on the 40% rate of tax, you could well find yourself paying a much higher tax bill. Indeed, some have worked out the change could take a huge slice out of their profits. In some cases, people will be left in negative figures. Once people in the higher-rate tax bracket work out their figures, there is a good chance they will decide to sell some if not all of their properties.
This could lead to an increase in the number of properties available for first-time buyers to have a chance of buying. It remains to be seen how this plays out in reality, but we have already heard the UK’s biggest buy-to-let investor has sold a significant chunk of his properties. Could he be the first of many to do so?