How the ground rules are changing for owners renting out property

CURRENT TAX REGIME LET us assume a landlord is a higher rate taxpayer with an annual rental income of £20,000 and paying annual mortgage interest of £13,000. For tax purposes, they can deduct the interest payments from the rental income, resulting in £7,000 of profits liable for tax.

The tax bill is £2,800 – 40 per cent of £7,000 – and the net profit is £4,200. NEW REGIME FROM April 2020, the mortgage interest of £13,000 will qualify for tax relief at 20 per cent (£2,600). However, tax must now be paid on the £20,000 of rental income at 40 per cent, £8,000. The total tax bill will be £5,400 (£8,000 minus £2,600 of relief applied) so this leaves a £1,600 profit – less than half what it was. IMPACT OF RISING MORTGAGE COSTS IF THE same landlord were on a variable rate mortgage and his or her mortgage rate went up, this could wipe out any profit.

For example, if the annual mortgage interest rose to £16,000, tax relief would be £3,200.

The tax bill would be £4,800 (£8,000 minus £3,200).

This would result in a loss of £800 a year.