Published by Paul Dell on 14 September 2015
I am not too sure what landlords have done to upset the Chancellor, but he seemed to have it in for them at the Summer Budget, announcing an array of changes, which will significantly increase their tax liability.
The most significant change announced was the restriction of tax relief available on mortgage and other loan interest payments. This change will affect rental income received on or after 6 April 2017 with further changes being introduced gradually over a four year period.
The Government has brought this in with the intention of making the tax system “fairer” by ensuring that buy-to-let landlords only receive tax relief on their loan interest at the basic rate of tax.
Historically, landlords with residential property were able to deduct 100% of interest incurred on mortgages or loans relating to their rental property, lowering their rental profits and therefore the income tax they were subject to. This is evidently highly advantageous and encouraged many landlords to reinvest their rental profits into new properties, rather than using the money to pay off existing mortgages or loans.
However, as of April 2017, the relief on finance costs will be restricted. The table below demonstrates the dramatic changes:
|Deduction from rental income
|Basic rate tax reduction from income tax
|75% of loan interest
|25% of loan interest x 20%
|50% of loan interest
|50% of loan interest x 20%
|25% of loan interest
|75% of loan interest x 20%
|0% of loan interest
|100% of loan interest x 20%
*These changes will not affect furnished holiday lettings.
As you can see these changes are graduated until tax relief is only available at the basic rate of income tax on the full amount of the mortgage or loan. The good news is that basic rate taxpayers will be unaffected. However, for landlords that are subject to higher or additional rates of tax, their tax liability will significantly increase, in some cases resulting in them making little to no profit on their rental income.
These changes are without doubt going to affect the viability of property investments. For those worst hit and with large portfolios they may consider selling off some of their property to repay mortgages. However, this is not always practical and in some instances may make matters worse. Alternatively, landlords could consider incorporating their portfolio, as the above changes will only affect the tax relief of individuals, not incorporations. Although this may trigger other taxes and will not work in every circumstance. Furthermore, with the controversial change to dividends (which was also announced at the Summer Budget), it means further tax will be due if the individual wishes to extract income from their portfolio, rather than reinvest.
Other changes you should be aware of:
- Wear and Tear Allowance – is to be abolished from April 2016. Instead landlords will be able to deduct the cost of replacing any furnishings within the property.
- Rent-a-room relief – this will be increased to £7,500 per year from April 2016, previously this was set at £4,250
We have nearly eight months until these changes are implemented, although, it is advised that you begin assessing your situation sooner rather than later. For a confidential discussion of your portfolio and how these changes may affect you, please contact your accountant.