Buy-to-let tax: How much will I pay and is it all worth it?

As mentioned in our article ‘Consider this before you invest in a buy-to-let property’, recent tax changes have marked a new era for buy-to-let investors. Existing Landlords now need to look at their current portfolios and think carefully before making any future investments. The return on investments may not be as good as they were, and so anyone new to the investing in property will need to take into consideration the tax they will be likely to pay before adding an investment property to their wealth.

In 2016, George Osbourne introduced a 3% stamp duty surcharge for anyone purchasing an additional property that isn’t their main residence. His reasoning? In his own words: “People buying a home to let should not be squeezing out families who can’t afford a home to buy. So I am introducing new rates of stamp duty that will be three per cent higher on the purchase of additional properties like buy to lets and second homes”.

Since the introduction of the stamp duty surcharge, it has become more expensive to buy. In the same year, Landlords also lost Wear and Tear Allowance, where previously they were able to claim tax relief for the wear and tear of furnishings in their rental properties without incurring a cost. This has lead to a change of plan for many people.

However, these announcements were a drop in the ocean compared to the loss of higher rate tax relief on mortgage interest payments.

What does that mean?

Starting in 2017, there has been a gradual reduction in the amount of mortgage interest that can be claimed against profits from residential property lets. This means that by the tax year commencing 6th April 2020, only basic rate tax relief will be available on mortgage interest.

To demonstrate in simple terms: If a Landlord’s total income, including rental profits (but before mortgage interest is deducted) pushes them into the higher rate tax band… they will face a substantial additional tax liability that they wouldn’t have faced before.

For example: A landlord paying just £10,000 mortgage interest each year could face an additional annual tax liability of between £2000 and £2500.

So the question you need to ask yourself is, could you afford this?

If you have an existing portfolio, please get advice from a professional before making any changes, in order to avoid getting into a tax trap. We specialise in advising landlords with portfolios of all sized, working with property agents and solicitors to ensure you get the best all round advice for your particular circumstances.

Should this put you off investing in property? Definitely not. Will these changes have an impact? Certainly. This is why careful planning and forecasting is more important than ever in making the decision to invest in a buy to let. Let us help you with the right advice for you.

If you’re a new or existing landlord, get in touch by emailing us at: discovery@a4g-llp.co.uk

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