Q. I am thinking of buying a property to rent out but have been reading that the tax status is going to change soon. Can you explain this please?

A. You are correct; there are changes afoot with tax relief on buy to let properties. Under the changes, landlords will be unable to deduct the cost of their mortgage interest from their rental income. Tax will be applied to the rent received, rather than what is left of the rent after the mortgage interest has been paid. The proposed tax changes will affect every mortgaged landlord who pays 40% or 45% tax. They will pay much more under the new plans. Some basic-rate taxpayers will also pay higher tax, as the change will put them into the higher-rate bracket. If you are buying the property without a mortgage you won’t be affected.

Here is an example assuming you pay 40% tax.

Currently:

Your rental property earns £10,000 per year in rent and the interest-only mortgage costs £6,500 a year. Tax is due on the difference, or profit. You pay tax on £3,500, meaning £1,400 for HM Revenue & Customs (HMRC) and £2,100 for you.

By 2020: 

Tax will be due on your full rental income of £10,000, less a tax credit equivalent to basic-rate tax on the interest. So you pay tax on £10,000 (£4,000), less the 20% credit (£1,300), meaning £2,700 to HMRC and £800 for you. The tax bill has now increased by 93%.

Additionally, if the base rate, and therefore your mortgage rate, rises even slightly, taking your mortgage cost to £7,500, you will pay £2,500 in tax – if rent stays the same – meaning you make no profit at all.

The tax change doesn’t in itself mean it is a bad decision to purchase a buy to let property, as there is always the long term expectation that the property value will rise.

 Q. I seem to recall that the last budget announced that savers would be able to replace cash which they have withdrawn from their ISA, is that correct and has it happened?

A. You are correct, it was announced in the 2015 March Budget that changes would be made to allow ISA savers to replace cash they have withdrawn from their ISA earlier in a tax year, without this replacement counting towards the annual ISA subscription limit for that tax year.

It would appear that this flexibility will be available in relation to both current year and earlier years’ ISA savings where this is provided for in the terms and conditions of a ‘flexible ISA’. This facility is not extended to Junior ISAs.

This is still at proposal stage and HMRC has published draft regulations, together with a draft explanatory memorandum and a Tax Information and Impact Note, for a period of technical consultation which will close on 8 November 2015. Hopefully we should hear more soon afterwards.

 

If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.