Buy To Let Tax Changes For Property Investors

The start of the new tax year in the signalled some big changes for expat property investors – and more may follow soon.

The long-awaited controversial axing of mortgage interest tax relief for higher rate payers is the major rule change to afflict landlords.

Not only are hundreds of thousands of landlords likely to pay more tax, but the way their profits are calculated is changing as well, catching more in the tax net.

Despite a year of protests and a failed High Court challenge claiming the tax changes impacted the human rights of landlords led by former Prime Minister Tony Blair’s wife Cherie, the government has stood firm and refused a U-turn.

Scrapping mortgage interest tax relief hits the pocket of any landlord paying income tax at the rate of 40% or more, including expats in the Non-Resident Landlord Scheme.

Mortgage relief phased out

From April 6, 2017, landlords receiving mortgage interest tax relief at their marginal rate will see the amount they can claim reduced in phases.

Landlords who could claim relief at 40% in the last tax year can only claim at 35% this year, which reduces to 30% next year and 25% the following year before settling at 20% in 2020.

At the same time, the way property profits are worked out changes, which could see some landlords paying tax at the basic rate of 20% hauled into the next tax bracket.

Also under consultation is the HM Revenue and Customs (HMRC) proposal for conditionality, which is aimed at identifying landlords and other businesses who do not pay tax on their profits.

Essentially, conditionality says if a business must apply to a local authority to trade, the business must prove registration for tax with HMRC before the licence is granted.

More changes on the way

HMRC highlights property letting as one of the target sectors for the new rules, which have no start date set yet.

“Tax registration could be made a condition of access to licences such as those issued by local authorities for private hire vehicles, trading, scrap metal, environmental health, planning, or property lettings,” said the consultation document.

“Conditionality could be applied to some of these licences in a targeted way, allowing HMRC to prioritise those sectors or areas of business which are affected by the hidden economy.

“It could also help HMRC to focus upon sectors where we know, for example, that there is a lot of self-employment or subcontracting which would lead to a large amount of self-reporting for tax purposes.”

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