Since 2017, changes have been happening to the tax paid by landlords. The changes to tax and income calculation for landlords are being slowly phased in until 2021. Here, we take a closer look at those phased changes, and how they will affect landlords who pay the higher rate of tax (40%).
Examples based on a higher rate taxpayer with a rental income of £20,000 and finance costs of £10,000, based on current higher rate tax of 40% and basic rate of 20%.
2017-2018
You are able to deduct 75% of finance costs from the income from property, and 25% is subject to basic rate reduction.
e.g. Profit is £20,000 less £7,500 (75% of finance income), which is £12,500. You pay 20% tax on £2,500 of that profit (£500) and 40% - normal tax rate - on the remaining £10,000 (£4,000).
Tax = £4,500
2018-2019
50% of your finance costs can be deducted and 50% deducted at basic rate.
e.g. Profit is £20,000 less £5,000 (50% of finance income), so £15,000. You pay 20% of £5,000 (£1,000) and 40% of the remaining £10,000 (£4,000).
Tax = £5,000
2019–2020
25% of your finance costs are tax deductible and 75% will be given basic rate tax reduction.
e.g. Profit of £20,000 less £2,500 (25%) = £17,500. You will pay 20% of £7,500 (£1,500) and 40% on the remaining £10,000 (£4,000).
Tax = £5,500
2020-2021
All finance costs will be subject to basic rate tax relief.
e.g. Your profit will be £20,000, the whole rental income. Of this, you will pay 20% tax on the £10,000 finance costs (£2,000) and 40% on the remaining £10,000 (£4,000).
Tax = £6,000
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