In the summer budget George Osborne highlighted a perceived disparity between landlord and homeowners, in that, currently, individual landlords can deduct their costs, including mortgage interest, from their profits before they pay tax, giving them an advantage over other home buyers. Wealthier landlords receive tax relief at 40% and 45% and this tax relief will be restricted to 20% for all individuals by April 2020.
To level the playing field the chancellor announced phased measures which means that from 2017 mortgage interest relief on rental properties will be reduced to the basic rate of income tax only.
The result will be to double the effective cost of borrowing for a taxpayer on the highest rate of tax. For example interest payments of £100 currently only cost £55 after tax relief for additional rate taxpayers, but will cost £80 from 2020.
The reduction in tax breaks for landlords will undoubtedly make buy-to-let a less attractive proposition, perhaps discouraging investment in the buy-to-let sector. This would potentially reduce the amount of rental stock available and push already escalating rents even higher.
Additional measures in the budget means that landlords letting out a fully furnished property no longer have the option of claiming a 10% wear & tear allowance as a 10% deduction against rental income. Instead landlords can only deduct the exact amount that they will incur.
The measures which are undoubtedly detrimental to the landlord are in response to critics of the old system claiming that it encouraged housing investment at the expense of the taxman, raised the cost of housing and out priced first time buyers. Currently 15% of new mortgages are on buy-to-let properties and this % was only predicted to rise.
However with the Bank of England interest rates predicted to not increase until next year and the current uncertainty as to how the stock market will react to the Chinese stock instability, property investment still remains an attractive proposition for investors!
To find out more about the tax implications for buy-to-let landlords, join us on the 13th of October, for our Landlord and Aspiring Landlord seminar, further details can be found here.