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Landlord Tax – Your Essential Guide

  30 Mar 2017

Landlords have had to deal with many changes in recent times but anyone who thought that 2016 would be a watershed moment for the industry will be sad to hear that further changes will be implemented in 2017. As of 6th of April 2017, there is a change in the tax relief for finance costs for landlords, and the changes will be phased in over a period of four years. By the end of the phased period, the level of tax relief for finance costs will be limited to the basic rate of income tax.

These changes are of note because it could have an impact on landlords, the amount of tax that they are expected to pay and the level of return a landlord can expect. There will be some landlords who are currently at the basic rate of tax who find themselves pushed into a higher tax band due to the changes. This is due to the fact that the level of taxable income is now calculated with any deductions for finance costs, which could be enough to place a landlord into a higher tax band. This may have a significant impact on the level of tax a landlord has to pay, so it is vital that landlords examine the situation with respect to how it is likely to impact on them.

The biggest impact will fall on people who are at the higher rate of tax and the additional rate of tax. This is because the tax relief on offer will be limited to the basic rate of tax, which is currently 20%, and this means that there will be a shortfall in this area. Any landlord who is currently only making a small level of net profit may find that they actually experience a negative cash flow after these tax changes have been implemented.

Landlords who are in the basic tax band and who will remain in this band after changes have been made will not be affected by the new landlord tax.

Example of the impact the changes can have

A landlord with a rental income of £10,000; mortgage costs of £5,000 and other costs of £2,000 have a taxable income of £3,000. (This is the outcome of 10,000 – 5,000 -2,000.) With tax of £1,200 due on this amount, the landlord makes a profit of £1,200 at the end of the year.

After the landlord tax changes come into effect, the equation changes. The rental income and costs will stay the same but the mortgage costs are not considered at first. This means that £10,000 of rental income minus £2,000 in costs leaves taxable income of £8,000. A landlord paying tax at 40% will have a taxable level of £3,200 while the mortgage interest relief rate, classed at the basic rate of 20%, stands at £1,000. This means that the tax due is £2,200 which when taken away from the £3,000 of taxable income, the landlord makes a profit of £800 at the end of the year.

Dropping £400 in profit can have an impact on some landlords but of course, this can also be seen as the landlord losing one third of their profits, which is a more concerning figure for many landlords.

Not all landlords will be impacted by these changes but it is vital that landlords


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