Budget changes for landlords

In its recent budget the Government announced that landlords will only be able to claim tax relief on their mortgage interest payments at the basic tax rate of 20%, rather than their marginal rate, which could be as high as 45%. This is a blow to those landlords who pay tax at higher rates because their costs will rise as a result. The Government, which has been trying to boost home ownership by helping first-time buyers, said the changes will only affect one in five landlords.

On a property worth £100,000, a landlord in a higher tax bracket with an 85% (or £85,000) mortgage and a mortgage interest rate of 5%, would end up losing £100 a year. When the interest rate rises to 5.5%, the burden on the landlord’s finances will jump again, triggering a loss of £440, and then to £780 when the rate reaches 6%, according to accountants Price Waterhouse Cooper. Portfolio landlords who have a high level of borrowing are set to lose thousands of pounds in tax relief.

HMRC (Her Majesty’s Revenue & Customs) regards income from letting out residential property as investment income, which means landlords don't get the full set of business reliefs on their activities. Landlords must pay tax on the profits they make after certain costs are deducted. The taxman calls these “allowable expenses” and they cover a broad range of items. Currently landlords can claim tax relief on the interest paid on their buy-to-let mortgage in full. Many landlords use an interest only mortgage because it maximises monthly cash flow and is also tax-efficient. Monthly payments on an interest-only loan are far less than on a repayment deal, where there is some element of capital repayment, so interest only provides landlords with increased monthly cash flow. Mortgage interest payments can be fully offset against rental income, this means that maintaining a large interest-only mortgage has been very tax efficient up to now.

Capital gains tax applies when you come to sell a property at a profit - any capital expenses such as improvements to the property and those expenses involved in buying and selling a property such as agent fees, can be offset against capital gains tax. The budget changes for interest rate relief won't have any effect on capital gains tax.

The Government's restriction on the relief on mortgage interest payments for all landlords to the basic rate of income tax (20%) will be phased in over four years, starting from April 2017.
When you take out a buy to let mortgage, the Broker's and arrangement fees have also been tax deductible and can be claimed back in the year you arranged a mortgage. However this is also likely to be restricted to the basic tax rate when the changes to mortgage interest relief come into effect.

I would point out that letting agent fees are still a deductible expense so landlords who use an agent to find a tenant or manage their property can deduct all of their fees for tax purposes. The property industry has mixed feelings on George Osborne's budget for cutting tax relief on private rental properties. You would expect investment in residential property to slow down based on these restrictions as letting a property may be more expensive  depending on your circumstances. However the changes have no effect on cash buyers or people who own their property without a mortgage.

You should take professional advice from an accountant if you think you are likely to be affected by these changes and you shouldn't rely solely on this article for advice.

Parkinson Property

24th July 2015


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