Buy To Let In 2020 – What Are The Changes To Tax Relief?

Buy to let properties have always been popular investments, especially over the past 20/30 years. Buying a property to let is exactly what it sounds like: you purchase a residential property with the intention of letting it out for a profit. When you buy a property to let, you become a landlord. When you become a landlord, you are running a business with important tax responsibilities. This guide is designed to help you understand the tax implications of making a buy to let purchase and to make the right choices when searching for Buy to let conveyancing.

What Are The Changes

Since April 2017, new rules surrounding ‘buy-to-let mortgage interest tax relief’ have started to be phased in. This has resulted in landlords gradually losing valuable tax relief on their buy-to-let mortgage costs. The chances are still being implemented and will continue until 2020 when they will be in full force. Here is an overview of what these changes are and what they could mean for you.

Buy-To-Let Mortgage Interest Tax Relief

Until recently, private landlords were able to take advantage of significant tax relief by offsetting their mortgage interest payments. However, Since April 2017, landlords have had to start declaring their rental income differently. This has meant that in most cases, tax bills have risen significantly. Once upon a time, taking out a buy-to-let mortgage was a major tax advantage. This is no longer the case.

Historic Tax Relief

Prior to April 2017, private landlords with a mortgaged property could deduct any interest paid on their mortgage from their rental income before tax was paid. So if you made £10,000 a year in rental income, with an annual mortgage interest payment of £9,000, you could take away the £9,000 from your rental income meaning tax would only be payable on the remaining £1,000. If you happened to be in the 20% tax bracket, the tax on your rental income would have been £200.

New Buy-To-Let Mortgage Interest Tax Relief Rules

Since the 2017-18 tax year, the new buy-to-let tax system has been phased in. This will continue until 2020 when they will be fully established. Every tax year during this transition period mortgage interest payments that are deductible from rental income will decrease by 25%. In turn, the portion of interest payments that qualify for the new tax credit will increase by 25%. After April 2020, all mortgage interest will only receive the tax credit. Here is how it has been phased in:*

  • In the 2017-18 tax year, you could claim 75% of your mortgage tax relief. 25% of your mortgage interest payments received the 20% tax credit.
  • In the 2018-19 tax year, you could claim 50% of your mortgage tax relief. 50% of your mortgage interest payments received the 20% tax credit.
  • In the 2019-20 tax year, you will be able to claim 25% of your mortgage tax relief; 75% of your mortgage interest payments will receive the 20% tax credit.
  • Before April 2017, you could claim 100% of your mortgage tax relief.

By 2020, you will not be able to deduct any of your mortgage interest payment from your rental income before tax. Instead, the total sum of interest payments will qualify for a 20% tax relief.

For example: a landlord receiving £10,000 in rent and paying £9,000 in mortgage interest payments will have to pay tax on the full £10,000, though this will still depend on which tax bracket they fall into. £1,800 could be deducted from their tax bill due to the 20% tax credit. This would leave them with a final tax bill on their rental income.

Why Is This Such Bad News?

These changes mean your tax bill will potentially increase in two ways. If you’re a higher / additional-rate taxpayer, you won’t get all the tax back on your mortgage repayments. This is because the credit only refunds tax at the basic 20% rate not the top rate.

Also you could be forced into a higher tax bracket as you will need to declare the income that was used to pay the mortgage, potentially increasing your total income into the higher or additional-rate tax brackets. This of course depends on any other income you receive.

Alternatively, some landlords with smaller profit margins could find that they are not earning enough to make letting property worthwhile.

What Does The Future Hold For Landlords?

The changes outlined above only affect private and individual landlords. Some have decided to set up their own limited company to try and reduce the impact of the new system. Transferring property into the ownership of a limited company will still count as a sale, which could mean capital gains tax is owed. Also, companies are likely to be limited as to choice of mortgages.

Buy-To-Let Conveyancing

In many ways, the buy to let conveyancing process is the same as that for residential properties. The same steps must be followed in each case. However, a buy to let conveyancing quote might include different factors to ordinary residential transactions as they tend to be more complex. For example, the title deeds may contain restrictive covenants that limit the use of the property It is essential your buy to let conveyancing solicitor researches this before you purchase.

As a buy to let investor, you can quickly compare competitive buy to let conveyancing quote online. Use our Conveyancing quote calculator. It saves both time and money. You can find a Conveyancer online and check costs. Find a Conveyancing Solicitor that understands your legal needs in an instant. Each conveyancing quote fully details the Solicitor’s fees and disbursements.

You can view and compare instantly, and when ready book a call from your Conveyancer. You can even filter by mortgage lender as we know that some stipulate that you must use a Conveyancer that has been approved by them. Conveyancing is a complicated legal process and it’s important to understand it prior to applying for a buy-to-let mortgage. It is essential to get more than one buy to let conveyancing quote and compare online conveyancing fees. Always instruct a conveyancing solicitor with experience in Buy to let conveyancing to ensure these difficulties are minimised through good management.

*Figures taken from gov.co.uk

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