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Buy to let tax changes

Changes to the way that buy to let income tax relief is changing. Tram Abramov, CEO of online tax return site TaxScouts explains the latest buy-to-let tax relief changes and how you can protect your income.

As part of its Summer Budget 2015, the Government announced that it would be changing the way that buy-to-let income tax relief is claimed and began to phase this in last year. However, these changes aren’t the easiest to understand, which means a large proportion of landlords still aren’t entirely sure how they’re going to be affected.

This article will help you to get a better idea of how much tax you’ll need to pay this year, next year, and from 2020 when the changes in question have finally come into full effect.

What are the changes?

Prior to 6 April 2017, before calculating the amount of tax they had to pay, landlords were able to deduct mortgage interest — as well as any other allowable costs associated with owning a buy to let property from their rental income. This meant that many were able to remain in a lower tax bracket and keep their costs low, as the amount of income they had to declare to HMRC was much lower than their actual rental income.

However, from April of last year, landlords saw the amount of money they could write off for tax purposes drop by 25% and this will continue each year until 2020 when they will have to declare all of their rental income, pay income tax on the full amount, and then claim back 20% of this as credit. This primarily affects landlords in two different ways: first of all, they’ll need to save a larger percentage of their rental income, so they can cover the cost of their taxes. And, they will have to declare a larger income amount to the taxman, which could move them into a higher tax bracket and cost them even more money.

How can I prepare for the latest income tax relief changes for landlords?

If you haven’t already taken steps to better understand and adjust to this new system, it’s important to start now. This will help you to avoid getting into financial trouble as the phasing in process continues.

According to the Government’s guidance, 82% of landlords won’t be affected by these changes, as their total income will be below the higher threshold. So, the first step towards protecting yourself is working out whether you actually have anything to worry about. The Government’s guide to how tax relief for landlords is worked out can help you to calculate how much tax you’ll have to pay during and after these changes (

If you find that you are going to be affected, and the amount of tax you pay is going to rise significantly, it’s likely you’ll want to find a way to protect your income. One way of doing this is to transfer ownership of your rental property over to a limited company, so you’re only liable for corporation tax and not income tax. Another option is to transfer ownership to someone who will be in a lower tax bracket, as the costs are likely to be much lower.

It’s important that all landlords educate themselves about the changes to buy-to-let income tax relief. While most won’t be affected, those who are could see their costs rise dramatically. So, it’s well worth looking into whether you’re going to have to start paying a lot more income tax, and whether there are steps you can take to protect your earnings.

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