New rules to be introduced next April are the latest in a line of tax changes to hit buy-to-let landlords.

What’s the latest?

Hundreds of thousands of landlords will be forced to pay a higher rate of income tax for the first time from April next year when new rules come into force.

An estimated 440,000 buy-to-let landlords who currently pay income tax at the basic rate of 20% will be pushed into the 40% bracket following the changes, according to the National Landlords Association (NLA).

And the higher tax bill will come even if the profits they make on their property do not increase.

Why is this happening?

Under current rules, landlords can deduct the cost of their mortgage interest from their total rental income before declaring their taxable income.

But April 2017 will trigger the start of a change of rules which will take three years to fully implement. By the start of the 2020/2021 tax year, 100% of the rent landlords receive will be counted when it comes to working out their tax liability. 

Having to show this 'higher income' to the taxman will push many landlords (especially those currently earning the upper end of the 20% basic rate threshold) into the next tax bracket up.

But even landlords who are already in the higher (40%) or additional (45%) tax bands will start to feel the squeeze from April 2017.

That's because the current relief landlords enjoy on mortgage interest will start to be phased out from that date. And by 2020/2021, the maximum relief available will be capped at the basic rate of 20% across the board.

This is a blow for higher and additional rate tax-paying landlords who have been used to claiming 40% or 45% relief on their mortgage interest.  

House to rent in London.

Above: two-bedroom terraced house to rent on Kenway Road, London. 

Who does it affect?

The NLA estimates the changes will mean landlords with just one property will have to pay an additional £3,600 in tax, while those with two to three properties will see their bill rise by £8,600.

Landlords in central London are likely to be hit the hardest by the changes with an estimated 31% who currently pay tax at the lower rate expected to be pushed into the higher-rate tax band.

Next in the firing line is landlords in the east of England where an estimated 30% will be hit, while the West Midlands follows just behind at 28%.

Tenants are also likely to suffer a knock-on effect, says the NLA, as landlords are expected to either hike their rents to cover their new higher costs, or exit the buy-to-let sector altogether.

Sounds interesting. What’s the background?

Richard Lambert, chief executive officer at the NLA, said: “When the Government announced these changes last year, it claimed they would only hit a small proportion of higher-rate tax payers. We now know that is complete tosh.”

The group is calling on the Government to change the rules so that they only apply to NEW mortgages taken out after April 2017.

The reshuffle around mortgage interest relief is the latest in a line of tax changes to hurt investment landlords.

In April this year, the Stamp Duty rate for people buying a second property was hiked to 3%, costing someone purchasing a £300,000 property £9,000 extra.

In the same month, landlords letting out furnished properties also lost an allowance. Having been able to claim 10% ‘wear and tear’ costs against their tax bill, they can now only claim for the actual cost of any damage or repairs.

The tax changes are likely to exacerbate the current shortage of rental properties.

The Royal Institution of Chartered Surveyors (RICS) recently warned an additional 1.8m new rental homes were needed during the coming decade just to keep up with growing demand.

Top 3 takeaways

  • An estimated 440,000 landlords will be pushed into the 40% tax bracket from April 2017 when new rules come into force.
  • The higher tax bill will apply even if the profits landlords make on their property do not increase.
  • The NLA warned that the change will force many landlords to either increase their rent or exit the buy-to-let sector altogether.

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