BTL Interest changes

starM

Hi,

I am ware from next April there will be changes to mortgage interest to be taken account as allowable expense when completed SA tax returns. I think it will start of 25% and then increase every year.

I have been searching online and found it will effect people on higher rate tax - basically who 40%.

I am basic rate 20% tax payer. Will this effect me?

Thanks
MS

starM

By reading this
http://www.telegraph.co.uk/property/buy/buy-to-let-calculator-how-will-new-tax-reduce-your-profit/

I think I understand how it will work.

Do you know how to declare the income to tax credits?

booksurr

if your total income (salary + interest + dividends + rental income) = <£43,000 you will be a basic rate taxpayer

the changes have NO EFFECT on basic rate taxpayers

uknick

booksurr wrote: »

if your total income (salary + interest + dividends + rental income) = <£43,000 you will be a basic rate taxpayer

the changes have NO EFFECT on basic rate taxpayers

Thank you for posting that.

I've been amazed by the number of people on the internet and radio phone ins (some of whom are supposed to the "expert" hosting the phone in) who say the change means no tax relief will be allowed on mortgage interest when the changes are fully implemented.

Pennywise

It "may" affect a b/r taxpayer. The interest will no longer be a deduction from profits, so total taxable income will be higher which may push a b/r taxpayer into higher rate, or may cause them to breach the £50k child benefit threshold. The tax relief is a deduction from tax payable not a deduction from income.

starM

So how this will effect me?

I earn 20k and receive rent payment of £500 which £266 is the interest I pay.

Thanks

booksurr

starM wrote: »

So how this will effect me?

I earn 20k and receive rent payment of £500 which £266 is the interest I pay.

Thanks

I assume you mean per month?
OLD Rules
gross pay 20,000
rental profit (500 - 266) = 234 x 12 months = 2,808
total taxable income 22,808 - personal allowance 11,000 = 11,808

basic rate tax threshold is up to 32,000. You are a basic rate taxpayer so tax payable 11,808 x 20% = 2,362

NEW Rules
gross pay 20,000
rental income 500 x12= 6,000
total taxable income 26,000 less personal allowance 11,000 = 15,000

basic rate tax threshold is up to 32,000. You are a basic rate taxpayer BUT tax payable now calculated in 2 steps:
a) 15,000 x 20% = 3,000
b) mortgage interest tax reduction (266 x12) = 3,192 x 20% = 638

Tax payable 3,000 - 638 = 2,362

the change has no effect on you or on those who remain in the basic rate band. As Pennywise says the keyo to understanding the possible impact is that the rental income is now a gross figure (6,000) not a net profit (2,808) so it can tip someone over the 32,000 basic rate threshold at which point the mortgage interest tax reduction is capped at 20% so they would end up paying more tax than the old way


In case you remain confused over basic rate thresholds everyone gets their first £11,000 tax free and then pays tax at the basic rate on the next £32,000 so 32+11 = 43,000 as the threshold for higher rate tax when you are talking about total gross income. When you are doing the calculation you pay tax on the taxable income after deducting personal allowance, hence 32k is the relevant figure in that case.

starM

booksurr, Thanks for this.

So does that mean when rules changes I will need to provide 26k to tax credit office rather than previous £22808?

booksurr

starM wrote: »

booksurr, Thanks for this.

So does that mean when rules changes I will need to provide 26k to tax credit office rather than previous £22808?

sorry but I do not know the first thing about tax credits let alone the answer to that question

starM

booksurr wrote: »

sorry but I do not know the first thing about tax credits let alone the answer to that question

OK No problem. I post this on benefits forum.

CC1982

Just to clarify though, before the rent is calculated as profit and added to my wage, I can deduct the normal expense for repairs, insurance, etc.?