The rapid growth of buy-to-let property has seen the number of private landlords reach almost two million, owning one in ten homes in the UK.
Against this backdrop, however, the government has been making life more expensive for landlords, taxing them at every step from mortgage to purchase, and ongoing letting, through to sale.
Under reforms introduced in April 2017, tax relief on residential property finance costs is being restricted from a landlord’s highest marginal tax rate to the basic rate of tax over the next four years.
This could significantly increase a landlord’s property profits (their taxable property income), meaning that, apart from paying increased income tax, many will be pushed into the higher rate tax band and various tax traps.
The higher rate threshold is £50,000 for clients in England and Wales (£43,431 in Scotland) this tax year.
Take, for example, an English landlord earning £45,000 a year, plus receiving £12,000 rental income and paying £2,000 in expenses, plus £6,000 mortgage interest…
As the chart shows, the calculation of the property profits/taxable income and income tax could change significantly.
In this instance, not only will the annual income tax liability have increased by £1,200 by 2020/21 (the difference between higher and basic rate tax relief), but because of the change in the calculation basis the taxable property income will have soared by 150% to £10,000.
While some landlords may consider moving their portfolio into a limited company to sidestep this and some of the other tax changes, this can be a minefield fraught with alternative taxes and costs.