interest tax relief changes, worked example please

Hugh1983

Hi, there seems a lot of info out there on the restrictions to interest tax relief that buy to let landlords are able to claim from 2020 (gradually coming into effect from 2017).

Can someone tell me what the effect on my situation will be:

This is our first year as a buy to let landlord so its not a full year but I will give full year figures to work from:

Renting to father £400 a month (regulated buy to let) £4800 income annually. Expenses of utilities and council tax come to £2570 annually (which we are paying), mortgage interest is about £3000 annually.

Currently with this example I will make a slight loss (which I don't believe I can carry forward as we are letting to relative).

Lets jump forward to 2020, what would my tax position be given the figures for income/expenses shown above?

Many thanks

AlexMac

I'm no expert, so hopefully one will reply, but my reading of the budget as reported in the papers was that this was no big deal unless you're already paying higher rates of income tax at 40% or more (which only ocurrs if your overall income including profit on lettings exceeds the tax thresholds of £42k-odd; below which you pay only 20% on income over the personal allowance of £10k or so).

So in your case, if you're rolling in it, with earnings over £43k or so, the relief on the £3k interest would halve from £1.2k (at 40%) to £600 (20%); hardly a disaster unless you're a professional landlord...?

If like me your income's under £40-odd thou' it'll make booger all difference. And in your case, if you don't make a profit on lettings, you won't pay tax anyway.

The other feature of the budget which I recall is the threat to remove the automatic 'wear and tear' (or was it replacements?) relief equivalent to 10% of income on - I think - furnished lettings, replacing this with relief only on your actual costs on repairs.

So in your case you'd lose the entitlement to knock £480 off the rent before paying tax on it... and only be able to knock off what you actually spend on maintenence, fees, renewals, gas safety check, bits of paint and putty, etc.

All of which figures (including the income tax thresholds) have to be fast forwarded a bit to guess what they'll be in 2020 or whenever.

So again, no big deal. Assuming your rental income's £4.8k, and your expenses are £5.5k plus fifty quid a year for a gas check and a couple of hundred for the inevitable bit of maintenence or repair, you're making a thumping great loss anyway, so there'll be no tax.

I'm not even sure if you can offset the Council tax (ask HMRC) but even if you didn't pay this £1k or so you'd still make a loss. And if you pay the £1.5k or so for the tenant's energy and water utilities, you'd only pay tax - at your usual top rate (in my case, 20%; maybe in your case, 20%,40% or 45%) on about £50 quid, so peanuts...

(assuming Rent income £4.8k, less £3k interest, less £1.5k-ish utilities, less £50 for a gas check, less say 200 quid for repairs = £50 taxable profit. Tax bill a tenner or so)

The taxman will probably then write to you and (unless you already have to fill in a self- assessment because of lots of other untaxed earnings) and tell you to stop filling in returns and wasting his time (like they did to me last year given my few£k profit; I said I'd rather fill 'em in online as I don't trust HMRC to work from an estimate!).

Best wishes; not many benevolent landlords around!

Innys1

Hugh1983 wrote: »

Hi, there seems a lot of info out there on the restrictions to interest tax relief that buy to let landlords are able to claim from 2020 (gradually coming into effect from 2017).

Can someone tell me what the effect on my situation will be:

This is our first year as a buy to let landlord so its not a full year but I will give full year figures to work from:

Renting to father £400 a month (regulated buy to let) £4800 income annually. Expenses of utilities and council tax come to £2570 annually (which we are paying), mortgage interest is about £3000 annually.

Currently with this example I will make a slight loss (which I don't believe I can carry forward as we are letting to relative).

Lets jump forward to 2020, what would my tax position be given the figures for income/expenses shown above?

Many thanks

On a related point - how did you receive the property you are letting out to your father? And is the rent you are receiving at the market rate?

The answers are important if the property was gifted to you - Inheritance Tax implications.

Hugh1983

We're basic rate tax payers so hopefully not a lot of change then. It seems I was reading it incorrectly from one example. I was reading that if income is £4.8k, expenses are £2500, I would only be able to offset 20% of the £3000 mortgage interest (£600) meaning a taxable profit of £1.7k meaning 20% tax bill on £1.7k when I'm not actually making any profit currently.

The house was purchased by us as an investment/place for my dad to live. Rent is in the general market rate ball park but probably at lower end. We're sucking it up as a slight loss at the moment for a place for my dad to live (given personal circumstances) and a long term investment for us paying off another mortgage. I was just worried that we would find our loss mounting even more and with the changes to interest relief and the inevitable interest rate rises on the horizon too.

Thanks for your input. I've written to HMRC asking how they want it reported