Buy-To-Let Tax Hikes 1st Sep 2015

The tax changes brought into effect in the July budget will impact buy-to-let landlords. The changes will be phased in over 4 years from April 2017.

At the moment, landlords are able to claim tax relief on their mortgage interest payments at the rate of tax they pay. Therefore if they are a higher-rate taxpayer, they are currently able to get 40% or even 45% tax relief on their mortgage interest.
From April 2017 this will be capped at 20% – the equivalent of the basic rate tax – regardless of what rate of tax they are paying.

Currently landlords are able to deduct the cost of their mortgage interest from their rental income when they work out the profit on which they have to pay tax. If landlords are no longer able to do this in full, they face an increase in the amount of tax they have to pay. Landlords who pay higher rate tax on rental properties with a mortgage will pay more tax. In saying that, some basic rate tax payers may also be affected as the changes might push them into the higher rate bracket.

Phil Nicklin, from Deloitte, says of this announcement, ‘this measure will almost double the effective cost of borrowing for a taxpayer on the highest rate of tax. Currently interest payments of £100 only cost £55 after tax relief, but will cost £80 from 2020. A landlord who borrows at even a modest level might end up paying more in tax than he makes in profit. This measure must make buy-to-let investment a less attractive proposition in future and may reduce the options for those who see it as an alternative to a pension.'

In addition, the tax rules are being changed so that the current furnishings ‘wear and tear’ allowance is being abolished and replaced with relief on actual costs incurred instead. Currently, if landlords are renting out a furnished property, they are able to claim relief of 10% of rent as an approximation for the amount you spend on furnishings. In the future, landlords will no longer be able to claim this amount; instead they will only be able to claim relief for actual expenditure. This is likely to reduce the tax relief available particularly in areas where rents are increasing significantly.

This comes at a time when the UK is facing a massive shortage in rented housing, and therefore everything should be done to encourage, rather than put off, investors. Furthermore, landlords may well be forced into increasing rents further in order to offset their increased costs – not good news for tenants.

However it’s not all doom and gloom. The changes do not come into force until 2017 and so good forward planning is the key. Buy-to-let property investors will have to factor the new rules into their calculations, and this could affect what they choose to buy, the offers they are willing to make and who buys a property, for example, the investor as an individual or a limited company owned by the investor. And as previously mentioned, it is likely rents will be driven up to compensate.

If considering buy-to-let, it is always wise to seek advice from an expert, and there are many Independent Financial Advisers who can help. The Key Place works with, and can recommend, IFAs. Contact us for further information.