Summer Budget 2015: buy-to-let landlords face slash in tax relief
Landlords pay income tax on the rent they receive by declaring the amount they earn on a Self Assessment tax return. The tax is charged in line with their normal income tax banding – 20% for basic-rate taxpayers, 40% for higher rate payers and 45% for additional-rate payers.
As things currently stand, landlords are allowed to deduct their costs, including mortgage interest, from their profits before they pay tax, which the Treasury says gives them "an advantage over other home buyers".
The wealthiest landlords get tax relief at 40% and 45% and this is what is changing next year thanks to the Chancellor's rule change – the tax relief will be restricted to 20% for all landlords.
"And to help people adjust, we will phase in the withdrawal of the higher rate reliefs over a four year period, and only start withdrawal in April 2017," said the Chancellor.
Osborne also announced that from April 2016, the existing 'wear and tear allowance', which lets landlords reduce the tax they pay, whether or not they replace furnishings in their property, will also be replaced. In its place will be a new system that only allows them to get tax relief when they actually do replace furnishings.
Adrian Anderson, director of mortgage broker Anderson Harris, said: "There had been fears among landlords that relief on mortgage interest payments for buy-to-let landlords would be completely abolished so while the changes will hit higher-rate taxpayers, it is not as bad as it might have been.
"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there is a more level playing field between first-time buyers and landlords but if this tax break had been completely withdrawn, buy-to-let would have been far less attractive to investors. Thousands of landlords may well have struggled to keep up repayments on their mortgage or struggle to pay the tax, especially when interest rates rise."
Nicholas Leeming, chairman of national estate agents Jackson-Stops & Staff, added: "The changes in buy to let tax relief will hit many small and older private investors.
"This a major blow to a sector that is heavily reliant on private investors and who provide a crucial supply of property to the private rental sector."
Meanwhile, Bhimal Hira, a chartered accountant at Jeffreys Henrey LLP, said: “Having spoken to several private landlords, a majority of them will look to increase rent to maintain current yields. Others are looking more closely at tax planning – particularly around shifting rental income between spouses on lower incomes, or using corporate structures to hold property which will not only allow all of the tax to be deductible but will only attract a corporation tax rate of 18% by 2020.”
A way of combining a mortgage and savings so the savings “offset” and reduce the mortgage. Rather than earning interest on savings, the savings reduce the mortgage and the interest paid on the borrowing, so savings are effectively earning interest at a higher rate than most mainstream savings accounts will pay. They are also tax-efficient, as savers avoid paying tax on interest that their deposits would otherwise have earned. Offset mortgages offer the disciplined borrower a great deal of flexibility, as overpayments can be made to reduce the term or monthly mortgage repayments, which can save thousands of pounds in interest payments over the mortgage term.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.