Not quite the snappy title I’d hoped for! However, such is the confusion about the impending changes to BTL mortgage tax relief that I thought it was worth tackling one of the more major misconceptions.
In this regard I am very much the bearer of bad news. Many currently basic rate taxpayers will end up paying higher rate tax on their rental income thanks to the change. It is entirely false to suggest that this will only affect those already paying tax at 40% and above.
Here’s the science. To be phased in by 2021, mortgage interest will no longer be allowed as a direct deductible expense. Instead a basic rate tax credit will be added back only after the “profit” figure has been calculated.
For anyone with a mortgage there will be a large optical increase in taxable profit. Take the example of a retiree with no other income, but £50,000 in rental receipts and mortgage interest of £30,000. Previously their marginal tax rate would have been 20%. Under the new regulations, however, the profit rises from £20,000 (£50,000 – £30,000 mortgage interest) to £50,000 (assuming no other expenses to keep things simple). Their marginal tax rate would immediately jump to 40% and only then would the 20% mortgage interest tax credit be applied.
In this example the pensioner with no other income pays £1,880 in tax currently, but would pay over £3,400 under the new regime. That’s an 80% increase in the tax bill of a formerly basic rate taxpayer.
Calculations available upon request.
Take care out there