Buy to Let Mortgage Interest Tax Relief
Explained (BTL VS B2SA)
The UK government implemented a new change in 2020, replacing the finance costs restriction
with a tax credit on mortgage interest payments.
Before 2017, you could deduct finance costs like mortgage interest from your rental income. In
2017, HMRC began phasing out the finance costs you could deduct over four years, while also
introducing a new relief known as "tax credit."
Landlords can no longer deduct any of the mortgage interest from their rental income when
calculating their taxable profit, thanks to tax credits that went into effect in April 2020. Instead,
landlords get a 20% tax break on their mortgage interest payments.
But how does it work for the buy to let and buy to serviced accommodation strategy? Let’s find
out.
So, before you know the way Buy To Let Mortgage Tax Relief can affect landlords, understand
how BTL and B2SA work. Then we will talk further about the taxes.
BTL VS B2SA
At its most basic level, serviced accommodation is similar to buy-to-let in that the raw product
or type of property that we could use is similar (if not identical) to a buy-to-let.
The main distinction between the two is that serviced accommodation is rented on a short-term
basis, similar to a vacation rental (except that not all guests will stay in the property for vacation
purposes), whereas a buy to let typically involves a 6 or 12-month Assured Shorthold Tenancy.
How do Buy-To-Let Work?
There are a few differences between Buy To Let Mortgage Tax Relief and traditional
mortgages. One of them is that the fees are usually much higher. Moreover, a deposit of 25% of
the property's value is a requirement for a buy-to-let mortgage (although this can range from 20
percent to 40 percent).
How does Buy-To-Let Tax Work?
With the changed Buy To Let Mortgage Tax Relief, CGT on buy-to-let second properties is
charged at 18% if you're a basic rate taxpayer. It goes at 28% if you're a higher or additional rate
taxpayer. CGT on other assets is calculated at a basic rate of 10% and a higher rate of 20%.
If you make a profit on your buy-to-let property, you will usually have to pay CGT if your gain
exceeds the annual threshold of £12,300. (For the 2021-22 tax year). Couples who own assets
together can combine this allowance, potentially allowing a gain of £24,600 in the current tax
year (2021-22).
How does B2SA Work?
If you're going to remain in serviced accommodation investment strategy, one thing you should
keep in mind is that you'll need to plan. It is because this type of property would not be
considered a normal residential property under one of the Planning Acts. It's essentially a
vacation rental. That's pretty much how they're going to handle it in terms of planning.
As a result, you'll require planning permission. It will impact other factors, such as how you
finance the property.
You'll need to figure out how you'll pay for a serviced apartment if you want to buy one. And if
you don't have enough cash to buy the house outright, you'll almost certainly need a mortgage to
cover the costs. The characteristics of the property will determine the amount of money you can
borrow.
Also, lenders may be willing to lend up to 80% of the property's value if you can release the
apartment from the management agreement within six months and use it as a permanent
residence.
How does the tax work for B2SA?
Although Section 24 stated that mortgage interest could not be deducted, this does not apply to
serviced apartments. As a result, you won't be able to deduct your mortgage if you rent out the
property for short stays, which is fantastic! This is why, to save money on taxes, many landlords
have converted their buy-to-let properties or HMOs to SA.
However, purchasing a new boiler for your home, or anything else for that matter, is completely
tax-deductible as long as you're renewing, repairing, or replacing it.
Bottom line
So, if you take a closer look at this guide, you will probably see that Mortgage interest tax
relief is also helping with the new opportunities for investors to get into the SA business.
However, you can always refer to professional experts in case you need more guidance about the
Mortgage interest tax deduction UK 2021.
Remember that laws are always changing and there is always a new opportunity and a new
direction to go on. But you don’t want to lose your way. So, if you have an expert with a detailed
understanding of both Buy To Let Mortgage Tax Relief and serviced accommodation tax relief,
you must consult them before taking any further steps.