Michael Lansdell from Lansdell & Rose Chartered Accountants talks this month about how the Budget announcement will affect buy-to-let tax relief.
The Chancellor’s announcement in July of significant changes to the tax relief available on buy-to-let investments will affect thousands of property investors in the UK, not to mention run the risk of rents increasing. However, changes will be phased in from April 2017 and only be fully operational in 2020, giving landlords time to assess their options.
The views expressed in this article are specifically those of Lansdell & Rose Accountants.
Why the decision for cuts?
In the months prior to the Summer Budget, the press painted a picture of the generosity of tax relief for buy-to-let investors. Could this have been a lead for the news that was to be presented in July? Possibly?
Either way, it is of little surprise that the government have focused their “money goggles” onto property investors to generate some well-needed extra tax revenue.
Landlords can currently claim back their mortgage interest cost against their rental income. It’s typically the largest monthly expense and can reduce the tax bill significantly.
With the low level interest rates of the last few years, many smart investors have in fact been increasing their borrowings by maximising their mortgages, to then grow their property portfolio whilst reducing their tax bill, due to offsetting increased mortgage costs.
“This will hit those people who sank their money into property because they were getting no interest on savings in the bank, or following the financial crisis, no longer trust the pension model, and are relying on rental income,” Phil Nicklin, Deloitte.
For those landlords who suspected a change was on the cards, they will be relieved that the tax relief was not completely abolished, as some feared, as a drastic measure to even-up the homeowner to landlord playing field.
The proposed changes
The change will only affect higher rate and top rate tax payers, who are currently able to claim tax relief on their mortgage interest at 40% and 45% respectively.
From 2020, instead of being able to claim at these higher rates, they will only be able to claim at the basic rate, currently 20%.
This new method will be phased in over four years, as follows:
- April 2017 – higher rates can be claimed for 75% of mortgage interest costs
- April 2018 – higher rates can be claimed for 50% of mortgage interest costs
- April 2019 – higher rates can be claimed for 25% of mortgage interest costs
- April 2020 – only basic rate tax relief can be claimed
How this could affect the wider population
Whilst landlords will be disappointed with the news, and will need to assess their options carefully, this change could have an effect on the dynamics of the rental property market.
Buy-to-let property owners may be forced to raise their rents, to cover the additional tax.
Or, investors may choose to sell-up, as their business model is no longer viable for them. This could release new properties into the market for first time buyers, which could be considered as positive, however, this again could restrict the supply of rental properties, again increasing rents.
A sensitive balance is required.
Lansdell & Rose are specialist medical and dental accountants with a key focus on tax planning for healthcare professionals.
Contact Michael today for bespoke tax advice
Claiming for “wear & tear”
A related announcement was made regarding the current 10% wear & tear allowance, calculated as 10% of rental income. This will be longer accepted for tax relief following 2016/2017. Instead, “wear and tear” needs to be claimed on actual costs, which is likely to work out less than the current 10%, but also means landlords need to spend actual pounds and pence to claim the tax relief.
What you can do to forward plan
The four year phasing is designed so landlords don’t have to hike their rents up immediately and any increases can be gradual. Speaking to a professional tax adviser in the first instance about your options would be wise, even at this early stage so plans can be put in place.
New investors considering a buy-to-let property purchase would be recommended to do the same before making any major decisions. A tax adviser can forecast the rental profits and give you an idea of the tax bill, taking into account different variables.
Read more from Michael
– 5 tax savvy tips to minimise tax
– Auto-enrolment pension update
– How the new dividend rules affect you
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