Buy-to-let mortgage tax relief changes will push many landlords into higher tax bracket

Hundreds of thousands of landlords will be forced into a higher income tax bracket, research claims.

It is a result of Government changes to the amount of tax relief that they can claim - a benefit that is being phased in from next year and eventually replaced by a 20 per cent tax credit.

New tax relief rules

The change will affect the way that property investors deal with their finances, with landlords having to pay tax on the total revenue they make from their rentals compared to only paying tax on their profit as is the case now.

This additional revenue on top of their normal income will push 440,000 people into the higher tax bracket, according to the research by the National Landlords Association.

Landlords pushed into higher tax bracket

Take, for example, a basic rate taxpayer with a property that is rented out for £15,000 a year on an interest-only mortgage costing £10,800 a year.   Until now, their rental income - for tax purposes - could be just £4,200 as they can deduct their mortgage interest before their tax is calculated.

However, under the new regime the rental income from the property will be judged to be the full £15,000.

It means that a landlord earning £35,000 remains a basic rate taxpayer under the current system as their total income would be £39,200. However, they would be judged to have an income of £50,000 under the new system and so qualify as a higher rate taxpayer.

NLA calls for government climbdown

Richard Lambert, chief executive at the NLA, said: “When the Government announced these changes last year, it claimed they would only hit a small proportion of higher-rate taxpayers. We now know that is complete tosh”.

Lambert urged the Government to consider only applying the rules to new buy-to- let loans, approved after April 2017.

He added: “Unless this happens, landlords will face an impossible decision of whether to increase rents and cause misery for their tenants, or to sell-up, and force their tenants to find a new home.” 

The research by the NLA found that 22 per cent of landlords said they would be pushed into a higher tax bracket.

A further 15 per cent had failed to calculate the impact of the changes on their finances.

How will the tax changes affect you? Tell us in the comments.

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