Buy to let mortgage interest relief changes to 2020
If you`re a private landlord of buy to let properties, then you need to understand the changes to buy to let mortgage relief that began to be phased in by the government in April 2017 and which will continue in steps until April 2020. Please note these rules do not apply if you are a limited company landlord.
Traditionally, landlords in the buy to let sector have been able to claim tax relief on any profits they have made from their rental income, by deducting the amount of interest that applies to their mortgage of the rent they get.
This means that the rate of tax relief they have been entitled to has varied depending on how much they have made from tenants` rents and how much interest they paid on their mortgage or for many finance costs. However, this will no longer be the case, due to the rollout of new government rules.
From April 2017, there will be a `finance cost restriction on tax relief` for buy to let landlords. It will fall by 25% each year and by April 2020, it will stand at the basic rate for all landlords. So by the end of the buy to let tax relief phased changes your personal tax liability will be lowered by a basic rate tax reduction. This will be calculated using the basic rate value of the finance costs (interest) that have been paid in the relevant year.
To begin with, landlords will still be able to save some tax against their finance costs using the old method, but they need to work out their total taxable property profits for the entire three year transition period to see the net effect.
Between 2017 and 2018, landlords will be able to deduct up to 75 per cent of their finance / mortgage interest costs from the rental income they net, with a tax reduction rate of 25 per cent applying to this sum.
Then, from 2018 to 2019, buy to let landlords can deduct 50 per cent of their mortgage interest costs from their rental income, while the basic rate tax reduction that applies will be increased to 50%.
From 2019 to 2020, 25 per cent of finance costs / mortgage interest will be eligible for deduction from total rental income, so the rate of basic tax relief landlords obtained on these increases to 75 per cent.
From April 202 buy to let landlords will no longer be able to deduct any of their finance costs from their rental income, while the amount of tax relief they are able to claim by deducting interest from their rent will have fallen by 100 per cent compared to pre April 2017 levels. That being said they will have the basic rate tax deduction applied usually based on the interest / finance costs, so there is some offsetting to the news overall.
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