The recent Summer Budget 2015 has meant substantial changes to the way buy-to-let investors will be taxed in the future - especially for those doctors with a mortgage and are higher rate tax payers.
The two main changes are:
1) Wear and Tear Allowance
At the current time, any doctor who has a furnished investment property can offset 10% of their rental income as a wear and tear allowance - irrespective of any actual costs incurred. From 6th April 2016 , this allowance will only be given on expenditure actually incurred on maintaining the property and furniture.
2) Tax relief on Mortgage Interest
Currently, doctors invested in a buy-to-let property who have a mortgage can obtain tax relief on their mortgage interest at their top rate of tax. However, from 2017/18 until 2020/21 this tax relief will be gradually phased out meaning that by 2020/21 tax relief will only be available at the basic rate of tax.
These rules will have a major impact on doctors who:
- Have a buy-to-let mortgage
- Are higher or additional rate taxpayers
Any doctors contemplating setting up a buy-to-let business in the future may prefer to run this business inside a Ltd Company structure where full tax relief on the mortgage interest would still be given and net profits would only suffer corporation tax at 20% (reducing to 19% and then to 18% over the next couple of years). Profits could then be extracted from the Ltd Company through dividends up to £5,000 tax free from next year and not attract National Insurance. Of course, there are a host of other factors which would need to be explored before going down the corporate route.
Any higher rate/additional rate buy-to-let doctor investors with mortgage interest will need to consider their position perhaps by repaying the mortgage if funds are available or by transferring the property to a low taxpaying spouse.
Remember the announcements in the Summer Budget are NOT actually officially law yet and could still be subject to amendment.
If you would like a review of your situation then please get in touch with firstname.lastname@example.org or telephone 0117 966 5699.