UK Landlord Forum / Life

Guys

forgive me for the potentially dumb post here, but I'm struggling to get my head around the new HMRC rules re mortgage relief.  All the press reports state the following (from telegraph for example)

"In a Budget that favoured homeowners over buy-to-let landlords, the Chancellor slashed the tax relief that private landlords receive on their mortgage interest payments, cutting it from 40pc or 45pc to 20pc by April 2020"

I dont understand this at all.  What we have been doing across our properties is expensing the FULL interest payment as an expense.  Does the above imply that it should only have been a percentage?

So - my example as below

Rent income:  12000
Allowed costs:  1000
Interest cost on mortgage: 5000

Gross Profit:  6000

Tax for basic rate @ 20%:  (6000@20%) 1200


Net Profit: 4800

thats how we have always done it but all this talk of a percentage cut in the tax relief on mortgage interest has got me confused as it was never a % in the first place, we just took the full amount of the interest we paid on the mortgage for the year.

Appreciate your thoughts on whether we ballsed this up!

The 'full expenses' that you talk about are to be offset against your tax, so (assuming you are basic rate tax payer) the £1000's you've been claiming for have only been taken off you income for tax purposes so you have been not paying 20% tax on that amount.  This change will affect the higher rate tax payers who were claiming the tax off against their income tax at 40%.  So there should be no difference for you.

Try it this way.


Total Income 0 - 11,000. Tax Rate 0%
Total Income 11,000 - 54,000, tax at 0% up to 11k then 20% up to 54k
Above 54,000 tax rate 40%

If your income from salary is £10,000 and profits from BTL £10,000, then £20k is less than £54k so all interest is "allowable"

Now if your Salary is £60k and your profit £10k, after paying £10k interest, ( simply say rental income of £20k)

BEFORE. Your tax is 11k@0% 43k@20%= £8600 + 6000 @ 40%= 2400. total salary tax £11,000+ BTL, £10k at 40% = £4000. Total Tax £15,000

NOW.

Everything the same BUT you cant claim £10k interest as an expense in 40% bracket, So you reduce your 20% band by the amount of the interest, so your new tax  0 - 11k = 0%, 11-44k, 20%, 44k+ = 40%, new tax paid £17,000.

Plus he got rid of wear and tear allowance ( which I use) and dividend relief on lower rate tax payers, over £5k ( which I set a company up for to pay us dividends in our retirement!)

There is time for everyone to adjust.

I am sure there will be legal ways and means of improving the situation for Landlords and I'm sure it's not the apocalypse or anything like that.

Agreed: Too early to determine the most tax efficient way to structure, as some of the details are not available yet. Should become more clear when the finance bill is issued.
For example it is not clear if the £5k dividend allowance is part of the basic rate or it is add on.
Similarly not clear how the calculation of the restriction will work when taking off the full amount will take you below the higher rate band, and taking the  restricted amount of interest will leave you above.

Also a small correction on Boboff's example - the basic tax band is between 11 and 43k rather than 11 and 54k. Logic in her example still holds though. I have provided the updated numbers below:

    Tax   
Band    BEFORE   New Budget
0-11k   0   0
11-43k   4,400   4,400
43k +   6,800   6,800
Restriciton of BLT
interest to
Basic rate               2,000
Total Tax   11,200   13,200

The above example represents the difference for 2020, when the full restriction is in force. Till then there are phase is rules which reduce the increase.

Ive been trying to understand this whole thing too. There are no working examples but everybody just says is bad haha. I've always calculated my returns the same as OP..
Correct me if in wrong PRASSIOO
But in the 11-43k tax band isn't 20% of "32k", 6.4k?

And as I understand we no longer can offset mortgage interest  against profit so now : pay interest rates with no relief and on top pay 20% off the total interest for the year in tax too?
thanks

Hi Cozbox,
You pay 20% tax on your income between 11k and 43k and 40% above 43k. Under the new budget, depending under which band you follow the interest on your BLT will either be wholly allowable or only 50% allowable.
Hope this helps.

The prices at Subway must have gone up massively.