Crackdown on mortgage interest tax relief for buy-to-let landlords

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In this summers’ Budget in July, George Osborne introduced a crackdown on mortgage interest tax relief which will affect thousands of buy-to-let landlords. Currently, landlords can claim tax relief on monthly interest repayments at the top level of tax they pay (up to 45%). In a move which will 'level the playing field for homebuyers and investors', the amount landlords can claim as relief will be set at the basic rate of tax (20%).

Over recent years the buy-to-let sector has boomed, with buy-to-let lending accounting for more than 15 per cent of mortgages taken out over the past 12 months. The crackdown on tax relief will be phased in over a four-year period from April 2017. Gráinne Gilmore, head of UK residential research at estate agents Knight Frank, said:

“This is a significant change for those with a rental portfolio, although the measured rate of introduction between 2017 and 2020 will help landlords plan their approach”.

The changes will impact middle-class landlords who have a sole buy-to-let property right through to professional landlords with bigger portfolios. Experts warn that some investors would now struggle to turn a profit. Phil Nicklin, from Deloitte, said:

“This measure will almost double the effective cost of borrowing for a taxpayer on the highest rate of tax. A landlord who borrows at even a modest level might end up paying more in tax than he makes in profit.”

The move could also force landlords to hike rents to compensate for the blow, which would spell bad news for tenants.

The budget document states that: 'The current tax system supports landlords over and above ordinary homeowners’. It’s fair to say that the 45 per cent tax relief puts landlords at an advantage in the property market against first-time buyers. So the move could mean good news for first-time buyers who are competing with landlords on the property market, which is currently seeing demand outstripping supply.

Those planning to purchase a buy-to-let property will have to factor these new rules into their calculations, which could make buy-to-let investment a less attractive proposition in future. It may also reduce the options for those who see it as an alternative to a pension.

Other changes

The budget document has also revealed the current system that allows those to claim 10% of their rent for wear and tear will be scrapped. From next April, landlords will only be able to deduct costs they actually incur.

The Chancellor also announced an increase in the amount of money homeowners can earn in rent from lodgers before tax. It comes after many campaigned for a higher earning level in the rent-a-room scheme. The level has been set at £4,250 of income for the past 18 years, but will rise to £7,500 from April 2016. Matt Hutchinson, director of website Spare Room has campaigned for the last six years for a higher threshold. He said:

“There are an estimated 19million empty bedrooms in owner-occupied properties in England alone. Freeing up just five per cent of those rooms would accommodate almost a million people - the equivalent of a city the size of Birmingham. Encouraging people to take in lodgers could help them avoid repossession when interest rates rise and their mortgage repayments are adjusted.”

Buy-to-let is a popular option for those who would rather grow their wealth through property than shares or cash. However, it's important to know what you’re getting into and to carefully consider the pitfalls. If you want to know more please give call us. We are helping clients in similar situations to plan their future and will help you understand your options so you can make the right choice, whether that’s to buy-to-let or not.

Sources: (Article: 16 July 2015). (Published paper: 'Restricting Financial Cost Relief for Individual Landlords' 8 July 2015).