New budget and BLT

[SandyD]

Can someone explain.. example

Contractor has property that generate 20K pa rental income

Offset income against:
Interest on mortgage £1000 per month (12 K pa)
Other rental expenses (agency fees, maintenance etc)

How would this change in the new budget??

[AddSum]

My review suggests that the change in rules for interest will not effect companies becuase there is no higher rate of tax. The corp tax is 20% the same as basic rate.

But you do need to watch out for the wear and tear allowance as those rules are also changing

For personal buy to let the restriction is only in the amount of tax relief and its being staged over a few years. If you are personally a high rate taxpayer then the tax relief will be restricted. Meaning you pay more tax.

[SandyD]

Thanks, am asking about the tax relief restriction by offsetting mortgage interest against rental income, (personal BLT)
I am assuming at the moment one can offset the whole of the mortgage interest, but in the future it would be 20% of it?? Is this right?

[AddSum]

No its not 20% of the interest deducted from the income

Your rental income will currently be reduced by the mortgage interest (not the capital part of the repayments) and also the expenses. You then pay personal tax on the profit if there is any. The profit is added to your other income and you tell the taxman on your tax return.

What changes next year is that if you pay higher rate taxes the amount of the interest allowed to reduce your profit will be limited and eventually when its fully in place to only give you tax relief at basic rate. The limit is being phased in but they havent said how quickly.

Basically you will pay more tax than now if you are a higher rate taxpayer.

[Crossroads]

I could be completely wrong, but I read it as:

- currently you can offset all of the interest payment at your highest marginal tax rate (so 20%, 40% or 45%).
- in your case, interest of £12k, and lets assume you are a 40$ tax payer.
- ignoring all other costs today: £20k income = £8k tax due, and you can claim relief on £12k interest at 40% (£4.8k). So your tax liability from the property is £3.2k
- next year: Still the same £8k tax due, however you can only claim relief on the £12k at 20% (so £2.4k), meaning you will owe £5.6k to the taxman instead.

If however you can somehow keep your overall income below the 40% threshold then it won't make any difference.

[SandyD]

Loool yes I know it means I will pay more tax, but am trying to workout the amounts roughly to see if its worth it, also there is an option of switching the BLT mortgage to the property I live in, it will be less interest rate, perhaps savings from less interest rates are better off at the end than the relief at basic rate (not sure how that works exactly, they say basic rate is 20%)
So for the example above - if someone mortgage interest is 12K pa, you can setoff the 12 K against the 20K rental income, but in the future only 20% of the 12 K i.e. only 2400 will be set off against the rental income?

[SandyD]

I could be completely wrong, but I read it as:

- currently you can offset all of the interest payment at your highest marginal tax rate (so 20%, 40% or 45%).
- in your case, interest of £12k, and lets assume you are a 40$ tax payer.
- ignoring all other costs today: £20k income = £8k tax due, and you can claim relief on £12k interest at 40% (£4.8k). So your tax liability from the property is £3.2k
- next year: Still the same £8k tax due, however you can only claim relief on the £12k at 20% (so £2.4k), meaning you will owe £5.6k to the taxman instead.

If however you can somehow keep your overall income below the 40% threshold then it won't make any difference.

Thanks very much, so if I keep my income from the company (Divs + salary) to lets 43K pa, I can still offset the whole of the mortgage interest ?

[centurian]

My quick interpretation is that, assuming you are a 40% taxpayer, then only half the mortgage interest will be offset, so in your example, you will be taxed as if the interest was £500pm, not £1,000, which means paying an extra £200pm in tax.

There are probably more long winded ways to perform the calculations, but this seems the easiest way to squeeze it onto the back of a fag packet - divide actual interest by 5 to work out how much it will cost you (assuming 40% taxpayer).

Haven't seen the detail yet though, or how it will be phased in, so this could be wrong.

But it's gonna mean paying more in tax for BTL landlords unless
a) You are a basic rate taxpayer
b) You own the rental property outright and do not furnish it.

[Crossroads]

Thanks very much, so if I keep my income from the company (Divs + salary) to lets 43K pa, I can still offset the whole of the mortgage interest ?

Not quite.

If your TOTAL income - i.e. salary + dividends + rental income + bank interest + anything else classed as taxable income is below the £43k threshold. The calculation gets more complicated if the income straddles the higher right threshold as you would only lose relief on income above £43k - I also expect dividends would be counted "last" but not sure how it will all work, the devil will be in the detail.

Looking purely at the rental income, as Centurian puts it above is how I have interpreted things too.

[SandyD]

But it's gonna mean paying more in tax for BTL landlords unless
a) You are a basic rate taxpayer
b) You own the rental property outright and do not furnish it.

If you own the property outright then you wont be needing to offset the rental income, i.e. you will be paying tax on the whole of the income.