Buy to let mortgages
Buy-to-let mortgages are usually only suitable for people who want to invest in houses and flats.
Commercial and business buy to let mortgages are not regulated by the Financial Conduct Authority.
A commercial or business Buy-to-let mortgage contract is one which is entered into by the borrower wholly or predominantly for the purposes of a business carried on, or intended to be carried on, by the borrower.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Some buy to let mortgages are not regulated by the Financial Conduct Authority.
Commercial mortgages are available by referral only.
How do buy-to-let mortgages work?
Buy-to-let mortgages are in many ways just like ordinary mortgages, but with some key differences:
- Interest rates on buy-to-let mortgages tend to be higher
- The minimum deposit for a buy-to-let mortgage is usually more
Buy to let tax changes
The income you receive as rent is taxable. You need to declare any rent you receive as part of your Self Assessment tax return. The tax on your income is then charged in accordance with your income tax banding (20% for basic rate taxpayers, 40% for higher rate, and 45% for additional rate).
But you can reduce the tax you need to pay by deducting “allowable expenses” from your taxable rental income.
Allowable expenses include:
- Rents, rates, insurance, ground rents etc
- Property repairs and maintenance
- Interest on buy-to-let mortgages and other finance charges
- Legal, management and other professional fees such as letting agency
- Other property expenses including buildings insurance premiums
How the current rules work
People buying to let have been able to claim tax relief on their mortgage interest payments at their marginal rate of tax. A basic rate taxpayer would get 20 per cent tax relief, those at a higher rate would receive 40 per cent relief, while top-rate taxpayers could claim 45 per cent.
To make the tax system fairer, the government have proposed to restrict the amount of Income Tax relief landlords can get on residential property finance costs (such as mortgage interest) to the basic rate of tax. This will ensure that landlords with higher incomes no longer receive the most generous tax treatment. To give landlords time to adjust the government will introduce this change gradually from April 2017 over 4 years.
How the new system will work
When the changes come in, tax relief will eventually be a flat rate of 20 per cent. Landlords who pay basic rate tax would see no change, but those on higher incomes will find themselves losing much more in mortgage interest payments.
How will it effect 40% Tax payers
Your buy-to-let gives a revenue of £20,000 a year and the interest-only mortgage costs £13,000 a year. Tax is due on the profit.
You pay 40pc tax on £7,000
£2,800 tax is payable.
Tax is now due on your full rental income of £20,000, less a tax credit equivalent to basic-rate tax on the interest.
You pay 40pc tax on £20,000 (£8,000), less the 20pc credit (20pc of £13,000 = £2,600).
£5,400 tax is payable
The effect of tax rules can change and will depend on your own circumstances.