Buy-to-let tax relief implications

Q: I’m a landlord – how will the changes to the buy-to-let tax relief announced in the Budget affect me?

A: The Chancellor’s recently announced Budget has brought with it some significant changes to the buy-to-let market, which will start to come into effect in April 2016.

Currently, landlords can offset the mortgage interest payments they pay on their rental property against the rental income they earn from that property. This has been great news for landlords, especially wealthier ones who are paying the higher rate of tax, as it meant that for every £1 of rental income they received, they paid 40p or 45p less tax; however, landlords paying lower rates of tax were receiving a lower tax break.

In many cases, landlords who could buy the property using 100% cash (i.e. with no mortgage at all) opted to take out a mortgage simply to benefit from the tax break. This relief was historically introduced to encourage investment into buy-to-let properties to boost the rental sector. However, the Bank of England noted in a recent report that it believes that the rapid growth of buy-to-let mortgages could pose a risk to the UK’s financial stability.

The recent Budget announcement will now restrict the tax relief available to landlords to 20%, which is the basic tax rate. The result will see landlords being treated equally and receiving the same tax relief, regardless of the rate of income tax they pay. It also included a reform on how landlords can treat the costs they incur in improving and maintaining their rental property; under current rules, landlords of furnished properties are entitled to offset 10% of their rental profit to compensate them for wear and tear expenditure, regardless of whether they actually spend anything, but from April 2016, the rules will change so that landlords can only deduct costs which they have actually incurred.

In my opinion, these tax changes shouldn’t dampen landlord investment. Whilst the existing tax rules are attractive to many landlords, they’re rarely main drivers in someone’s choice to invest in property as opposed to other investment alternatives. If you are a landlord, make sure you seek proper tax advice. And if you’re a tenant, you may find your landlord more willing to spend money on the property, which is always good news!

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