Restriction Of Buy To Let Interest

In the Summer Budget it was announced that mortgage interest relief for buy to let landlords would start being phased out from 2017/18 onwards and restricted to basic rate only from 2020/21.

Now that the Finance Bill has been published the full impact of this change is starting to emerge and for some landlords this will result in a significant increase in the tax payable as their rental profits will now be taxed at higher rates. This is because mortgage interest will no longer be an allowable deduction in arriving at rental profits.

For example a landlord with £60,000 of gross rental income, £6,000 of agent’s commission, £8,000 of repairs and other expenses and £40,000 of interest would currently have £6,000 of net rental profits.

However, from 2017/18 the interest relief will start being restricted, and from 2020/21 there will be no deduction for interest, which would mean that, assuming the rent and expenses remain the same, the taxable rental income would be £46,000.

For many landlords this will mean that the rent will fall into the higher rate tax bands and the £40,000 interest will result in a £8,000 basic rate tax reducer to set against the tax liability.



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Mortgage Market Review 2014

Significant changes have come into effect as a result of the Mortgage Market Review (MMR).  Tougher mortgage rules mean that lenders will have to carry out detailed checks on a borrower’s spending and stress-test ability to pay if interest rates go up. 

The changes came into force from 26th April 2014 and for borrowers mean that they will have to account for all outgoings.  They will face additional questions focused on imminent changes to their lives which will need to be backed up with evidence.

FCA Mortgage Market Review 2014

The regulator behind the new rules, the Financial Conduct Authority (FCA), said they would "hardwire common sense into the mortgage market", and prevent a return to irresponsible lending that took place in the run-up to the credit crisis.

APJ Accountancy comments:

“Some lenders adopted the rules earlier this month, but the changes will mean that anyone who applied for an agreement in principle on a loan several weeks ago, or who has applied for a mortgage and wants to make a material change - perhaps borrowing more – will have to start the application process from scratch.”

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