Buy-to-let landlords are being pushed over tax cliff edges, as their taxable income is increased by restrictions on the amount of interest they can deduct from their rents.
Back in 2015 I warned that individual landlords would face huge tax bills, as the tax relief on interest and finance charges connected with letting residential was gradually reduced, from a 25% restriction in 2017/2018 to 100% block from 6 April 2020. This restriction does not apply to corporate landlords, or those letting furnished holiday lettings or commercial property?
The higher income tax bill is partially softened by a tax credit equivalent to 20% of the blocked interest, but it is the amount of taxable income which determines eligibility for many allowances, and has a knock-on effect for other taxes.
The Low Income Tax Reform Group (LITRG) has identified over a dozen unintended consequences of the restriction on interest deductions, which I’ve categorised below.
Where taxable income exceeds the basic rate band (£50,000 in 2019/20, £43,430 for Scottish taxpayers) the marriage allowance is withdrawn. This is the transferable part of the personal allowance which can only be utilised if the recipient doesn’t pay tax at rates higher than the basic rate, or the intermediate rate (21%) in Scotland. Thus just £1 of income in the higher rate band means all of the marriage allowance is lost, worth £250 for 2019/20.
The personal allowance is tapered away by £1 for every £2 of taxable income over £100,000, producing a marginal tax rate of 60%, or 61.5% for Scottish taxpayers.
The pensions annual allowance is reduced by £1 for every £2 until it reaches a minimum of £10,000, where net adjusted income exceeds £150,000. If pension contributions are paid in excess of the annual allowance, taking account of any unused allowance brought forward, the taxpayer will be subject to a pensions annual allowance charge at their highest marginal tax rate.
Where one or both parents has taxable income over £100,000, they are not eligible to have a tax-free childcare account. Breaching this income threshold will also mean the family loses entitlement to 30 hours free childcare. The family can also be hit by the high income child benefit charge (HICBC) which will claw back child benefit paid to the family by 1% for every £100 of the higher earner’s taxable income over £50,000.
In both cases the income of the higher earning partner effects the entitlements of the whole family.
Parents who are liable to pay child maintenance will find they have to pay larger amounts based on their taxable income.