Landlords join us in the fight against changes to Mortgage Interest Relief! If you are not already aware buy-to-let investors are facing huge finance and tax changes from 2017. Currently landlords are able to offset the amount of interest they pay to their lenders annually on their mortgage against their tax bill. This means landlords are currently entitled to treat interest paid as an expense of their lettings business in the same way as any other business. However, from 2017 this is all changing with the government phasing in a reduction to the amount claimed and by 2020 will replaced by a basic rate relief tax reduction.
The phased-in changes to the amount of finance costs that you will be able to deduct from rental income between 2017 and 2020 will be:
- Between 2017 to 2018: 75% of finance costs
- 2018 to 2019: 50% of finance costs
- 2019 to 2020: 25% of finance costs
- From 2020 on-wards: 0% of finance costs with basic rate tax reduction at 100%
As private landlords we are providing a vital service and we are subject to over 400 regulations, with far reaching requirements on property conditions, health and safety, deposit protection, and right-to-rent. Moreover, landlords have to be on call 24-7 for any problems with their properties. We estimate from a survey of almost 1,200 landlords that 60% of landlords will be pushed into the higher rate of tax from the removal of mortgage interest relief even though their income has not increased. This could have huge implications for landlords, this could reduce your personal tax allowance and impact on tax credits.
One example of the impact of these changes to Mortgage Interest Relief is:
A landlord, after paying all his other expenses, has a net rent for a property for a year of £7,000. His mortgage interest for that year is £3,500. If he can deduct mortgage interest he pays his tax on £3,500 at 20% which means a tax bill of £700. If, on the other hand, the interest is not tax deductible his tax bill becomes £1,400.
From this example, the loss of mortgage interest relief doubles the amount of tax being paid by the landlord, we argue this change will reduce the amount of investment in the private rented sector, reducing current standards of housing and reducing supply, and increasing rents as landlords seek to offset the increase in tax.
A further impact of these changes could be landlords making a loss due to these changes. An example of this is:
A rental property is purchased for £200,000 yielding a rent of £750 per month, which is an annual rental income of £9,000 a year. The running expenses are £1,000 p.a. leaving an income after these expenses of £8,000 p.a. There is a mortgage at 65% of the value of the property of £130,000 on which the landlord is paying 5% p.a. interest on an interest only loan, with interest at £6,500 p.a. This leaves a net income before tax of £1,500 p.a.
With mortgage interest relief, the tax (at 20% rate) is £300, which leaves the landlord with £1,200 net profit. Overall, this equals a 1.7% return on the equity investment made by the landlord (on the £70,000 capital invested by the landlord).
After mortgage interest relief is removed, the amount of tax payable rises to £1,600 at the 20% rate. On the £9,000 a year rental income after the £1000 running expenses, this leaves income of £8,000. After the interest of £6,500 and the tax bill of £,1600, this leaves a net loss of £100 after tax. This represents a negative return on investment on the landlord’s own equity.
Neither of these examples make any allowance for any void periods or rent arrears. Furthermore, if a landlord has other income, then the tax rate can quickly increase to 40% and makes this situation even worse for the landlord. In either situation, this is increasing the rate of tax for buy-to-let landlords with harmful consequences for the sector.
What can be done?
We have been against the changes to mortgage interest relief since it was announced. We have lobbied across the country, contacting MPs, Peers and Ministers to voice our serious concerns and we have had a number of successes. Including a surge of support for our campaign from Tory backbenchers, including Lord Flight publicly backing our campaign in The Telegraph. Even the TaxPayers’ Alliance have said these changes are unfair. We have been urging our members to contact their MPs over this issue, with over 400 already doing so and some even meeting with their own MP to challenge these unfair and disastrous changes to the taxation of the private rented sector.
We are also supporting the campaign led by Steve Bolton and Chris Cooper, with financial, legal and research support. Our policy director David Smith was invited to speak at their Tenant Tax Summit to discuss our political lobbying and our recent successes.
The Government is now asking for responses from the public for their Autumn Budget, while we will be submitting our own response, we are urging all landlords to complete the survey to ensure the government has to listen to the concerns of the private rented sector.
You can also listen to John Stewart, our Policy and Communications Manager, in our video below on the mounting opposition to the Section 24 changes.