I first got into buy to let 10 years ago and I’m a little bit worried I might have to sell up because of some of the new regulations. The government cut mortgage tax relief at the beginning of April, but I’m not sure what this means for me?
It’s hard to answer your question without knowing more about your personal circumstances. I strongly recommend you to take professional advice from either an accountant (who is familiar with the changes to tax relief on buy to let mortgage interest) or a specialist tax adviser.
For those who are not aware, income tax relief on buy to let mortgage interest and other finance costs is being restricted to the basic rate, i.e. 20% regardless of your actual tax band. Crucially, these costs can no longer be taken into account when calculating taxable profit. This restriction is being phased in over four years from 6th April 2017 and will be fully effective from 6th April 2020.
The new rules mean a greater tax liability, particularly for higher and additional tax rate paying landlords, some of whom could find that they go from profit to loss! If you are a basic rate tax payer do not assume that you won’t be affected. The changes to the way the tax is calculated could mean that you are tipped into the next bracket.
But it’s not all doom and gloom. There are ways to mitigate the situation which is why taking professional advice is imperative. Many landlords have found that operating their portfolios via a limited company is more tax efficient but to incorporate will incur costs, which is why you must take tax advice first.