The Government has brought in a lot of changes in the last few years. One area which has been subject to change is the buy-to-let market. One of the main changes affects the right to claim 100% of your mortgage interest against the rent.
Previously, you could claim it all as a business expense, and therefore offset your mortgage interest payments against rental income. (Please note it has to satisfy certain criteria so there are exceptions to this capability.)
Let’s imagine you have an interest-only mortgage of £100,000 on which you are being charged an interest rate of 5%. In this case, your mortgage payments would be approximately £417pm. If you were receiving £600pm in rent, and you offset the mortgage payments (only), your taxable rental income would be £600pm-£417pm = £183pm.
Being phased in from 2017 onwards, the amount of mortgage interest payments you will be able to offset will be capped at 20%. (Please note there are exceptions to this rule, such as when the property is owned by a limited company and holiday lets.)
Currently, mortgage interest is deducted and tax is payable on the net amount. From 2017, tax will be payable on the total rental income and then you can reclaim the mortgage interest (£83.40 in the example above) via your tax assessment.
- Landlords will be able to claim 10% wear and tear for furnished properties. This is to ensure that landlords only deduct expenses that have actually occurred. (Previously, wear and tear expenses could be claimed even if no improvements had been made.)
- From 1 April 2016, you may have to pay 3% stamp duty if you purchase a second property costing over £40,000.
There are exceptions to all these rules which make them a lot more complicated, so please seek Independent Financial advice.
At Monetary Solutions Ltd, you can book a free initial consultation about any financial matters, so please call us on 020 8655 8488.