Recent Section 24 changes are now in force. and will affect landlord tax liabilities. As from this current tax year (2017/18), buy-to-let landlords who sit in the higher-rate or additional-rate tax bands will be hit with higher tax bills. Those who are nearing the limit of the basic-rate tax band are also likely to end up paying more tax.
Prior to the current tax year, as a buy-to-let landlord you were allowed to deduct the full amount of allowable expenses (mortgage interest payments often being the biggest) from your profits. You effectively only paid tax on the rental profits.
Allowable expenses for buy-to-let landlords included:
The Government has decided to change this, so that by the 2020/21 tax year, you’ll only be able to claim basic-rate tax relief (currently 20%) on your buy-to-let expenses. This move is staggered over four years.
Landlords who remain in the basic-rate tax band won’t see their tax bills on buy-to-let properties rise. However, you may find the reduction in tax relief pushes you into the higher-rate tax band, which will ultimately mean a higher tax bill.
The new rules also only apply to buy-to-let landlords. If you rent out commercial property or have furnished holiday lettings, you won’t be affected by the changes.
The changes will be brought in gradually over the next four tax years, having started in April 2017, and are as follows:
|Tax Year||Tax relief on allowable expenses||Tax relief at basic-rate on allowable expenses|
James has a salary just in excess of the higher-rate tax threshold each year. He also receives rental profits of £40,000 before deduction of interest costs which amount to £20,000 each year. James will pay tax as follows on his rental income:
|Profit before interest||40,000||40,000||40,000||40,000||40,000|
|Less: Interest||20,000||15,000||10,000||5,000 0||0|
|Tax @ 40%(A)||8,000||10,000||12,000||14,000||16,000|
|Basic rate relief on||0||5,000||10,000||15,000||20,000|
|Tax payable (A-B)||£8,000||£9,000||£10,000||£11,000||£12,000|
As we can see, by the time we get to 2020/21 the tax James pays on his rental income will have increased by £4,000.However, the extra tax payable in the intervening years is less because the interest deduction is only partially withdrawn.
Without knowing your individual circumstances, we are unable to advise on whether a limited company structure is best for you. However, if you have more than one property and you don’t need to regularly withdraw the profits generated, it could well be more tax-efficient to run them through a limited company. It is recommended professional tax advice is sought for further clarification.