How will the crack down on mortgage interest relief affect buy to let landlords?
By Alan Marlow, JRW Chartered Accountants
This year, buy to let lending has accounted for more than 15% of mortgages taken out.
If you are a buy to let landlord, you will no doubt be well aware that your earnings are going to be hit after George Osborne cracked down on mortgage interest tax relief in his summer Budget.
The move will mean that the amount landlords can claim as relief will be set at the basic rate of tax, currently 20%. Currently, landlords can claim tax relief on monthly interest repayments at the top level of tax they pay, and can therefore obtain relief at 20%, 40% or 45%. The change will be phased in over a four year period from April 2017.
This will hit all landlords, from those with just a single buy to let property right through to professional landlords with extensive portfolios who sit in the highest tax bracket. Some experts believe the move could also force landlords to increase rents to compensate for the change, which would mean bad news for tenants. But it could be good news for first time buyers who are competing with landlords on the property market which is currently seeing demand outstripping supply.
Many experts have previously said the 45% tax relief puts landlords at an advantage in the property market against first time buyers. Mortgage Interest Relief was withdrawn from homeowners 15 years ago, however, landlords still receive the relief. The Government, which has been trying to boost home ownership by helping first time buyers, said the current tax system supports landlords over and above ordinary homeowners as landlords can deduct costs they incur when calculating the tax they pay on their rental income, a large portion of those costs being interest payments on the mortgage.
The change will definitely hit those people who invested their money into property because they were getting no interest on their savings and are relying on rental income. This measure must make buy to let investment a less attractive proposition in future and may reduce the options for those who see it as an alternative to a pension. It is only fair that there is a more level playing field between first time buyers and landlords but if this tax break had been completely withdrawn, buy to let would have been much less attractive to investors.
Another important change for landlords that came largely unnoticed after the headline announcement about mortgage interest relief is that they will no longer have automatic entitlement to a tax break for wear and tear of their properties. From April 2016 the formal Wear and Tear Allowance, which allows 10% of rental profits to be written off for notional wear and tear, even if there has been no such actual expenditure in that year, will be replaced with a relief that enables all landlords to deduct the costs they actually incur on replacing furnishings in the property.
Please see our Buy to Let Guide for comprehensive information about the topic more generally.