Originally published at: https://blog.openrent.co.uk/landlord-guide-to-2020-new-rules-and-big-changes/
Some significant events are coming down the tracks for landlords in 2020. We’ve pulled together the key dates to remember and the important new rules to know about. Goodbye, Section 21 Evictions The Conservative manifesto pledged to end ‘no fault’ evictions, following on from a Government promise last April to scrap Section 21 evictions. This…
Your review of the 2020 rules for landlords is very misleading in respect of the mortgage interest tax relief.
The article states that " no mortgage interest costs will be deductible, but instead will be taxable at the new basic rate of 20%".
This is not strictly correct as HMRC’s example clearly shows that the mortgage interest is still allocated tax relief at the basic rate of 20%.
The purpose of this amended format for calculating mortgage interest tax relief, is to prevent higher rate tax payers from utilising these costs as an expense in order to reduce their tax liability from their higher tax rate.
Therefore the new method of calculation will NOT be taxable at 20%, it will still be a RELIEF but limited to a tax allowance at the rate of 20% instead of 40% for higher rate tax payers.
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Thanks Chris,
This 2020 rule is so confusing.
Will I pay, will I not pay, OMG
Toyab, it may seem so, but in simple terms you get 20% tax relief no matter your income level.
Previously the relief in effect “reduced” your taxable profit which was added to your other income as earnings and tax taken at the appropriate rate for your total “earnings”.
Hope this helps.
Chris your post is still not the whole truth. This change does not restrict relief for higher rate taxpayers, it adds the finance costs to your taxable income. It therefore pushes you into the higher rate tax bracket and removes things like child benefit. It is the most unfair and ruinous tax on small landlords that could ever be invented.
Oh that’s interesting. I was considering moving some properties into my Ltd co for the long term benefit, but as I’m not a high rate tax payer, you seem to be saying that there will be no point.
I didnt know this. Thanks… will validate via accountant.
Would there not also be capital gains to consider when transferring?
Hi Chris, thanks for your comments. I’ve updated the original post with wording from a tax accountant, which I trust will be clearer. This is a complex issue and not all online resources give the full picture, but rather only the most likely scenario.
Sam
I am certainly no expert, so would recommend everyone to visit the HMRC website to see the rules and examples, or contact your accountant.
Paul 50 is absolutely correct, in that the way the income is now viewed (excluding the mortgage interest expense), your profit will appear higher at the income tax calculation stage, and could therefore push some landlords into the higher tax bracket. Therefore that portion of your income in the higher tax bracket would be subject to the 40% rate, before the 20% allowance on mortgage interest is applied to your final tax figure.
I agree, it is completely unfair, the mortgage interest is undoubtedly a business expense. However the HMRC do not consider property letting to be a business, therefore it’s hard to argue it’s not a level playing field with other businesses. They obviously haven’t got a clue how much actual work is involved in property management, and to designate it an investment income is incorrect IMHO.
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For me, these changes to the rules have pushed me way into the 40% tax band, taking into account my income from my permanent employment. The way I am negating this is by paying a significant chunk of my monthly rental income, from my 4 buy-to-lets, into my SIPP. For every £1,000 I pay into my SIPP, the taxman adds £250 and my 20% tax band will be increased by £1,250. Providing I have done my calculations right based on my anticipated rental profit and income from my full-time employment, I will pay in enough per month to ensure my 20% tax band increases enough to ensure I won’t pay any tax at 40%.
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I hope your calculations and manoeuvres are successful.
Another possible avenue is to declare your property letting / management activities as a business. I was told many years ago by HMRC that in some instances (?) this type of income could be deemed a business. I never pursued it because I had semi retired and split the income between myself and my wife so avoided the 40% tax bracket, and couldn’t be bothered with the hassle to save a few quid on tax allowances for capital expenses, office use, etc, particularly knowing we were soon to move overseas and use a letting agent for future management.
Thank you Chris. I suspect the Chancellor will scupper this in the upcoming budget by scrapping the 40% pension tax relief rate. The hassle and expense of transferring the properties into a limited company doesn’t appeal to me so I plan to sell 2 or 3 of them if the 40% pension tax relief rate is scrapped.