Summer Budget 2015: buy-to-let landlords face slash in tax relief

Buy to let

Buy-to-let (BTL) landlords will only be able to offset mortgage interest at the basic rate of tax (20%) by 2020, George Osborne has announced.

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there is a more level playing field between first-time buyers and landlords but if this tax break had been completely withdrawn, buy-to-let would have been far less attractive to investors.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.”

Your Comments

Good move. Houses are for living in, not investing in.

Very small minded and short sighted. I have a buy to let property which was my wife's old house. We couldn't sell it so we rented it out to a single parent on benefits who, strangely, lives in it! She has her rent paid by the state and couldn't afford to buy at any price. We also have friends who rent by choice. They also "live" in their rented property. Most landlords are ordinary people who provide a much needed/wanted service.

As a BTL landlord with a BTL mortgage, I would have to pay around £40pcm in tax, as I have a pension that takes me less than halfway up the 20% band - but I can switch my rental property to my wife who has no income - thus no tax to pay - but she will have to start doing the self assessment forms - so there will be increased bureaucracy to contend with, but the chancellor will not be getting any extra. 
However, many Landlords will increase the rent to cover this so how much will it increase? Now I have a 10 year old 50% mortgage at the pre-crash low rate, my house is a semi, with the other side being owned by a new BTL landlord with a modern higher rate mortgage. His tax will go up by about £100 (as he paid 30K more than me, and has a 75% mortgage at a higher rate (but he too is only at the 20% rate). He already charges tennants about £25pcm more than me, so if he increases his rent by £100 to cover the increase - that means I (sorry, my wife) can do the same. This way we have increased our income by £100pcm (tax free), but our tennants are still paying £25 less rent than next door. I wonder whether Dex thinks I should be charitable and maintain my £25 "discount" or just go for the market rate?

re comments by LeMajor.
very interesting what you say but can I pick you up on one point, you say the neighbour will incur 100 pound more in costs but also you say he is a basic rate taxpayer, if this is the case no extra will be incurred, the changes to the interest relief only affect higher rate taxpayers.

I had not appreciated that a basic rate taxpayer would not be hit - so thanks for that - as for the neighbouring landlord, his professional career may one day take him beyond the BR band, however the main point was that for those (Higer rate taxpayers) who are affected, they will probably raise rents (assuming they are commercially minded), which will trickle down, affecting market rates across all rental properties, regardless of the landlords tax bands. Ultimately it is the consumer who pays.

Dex. what a pillock you are.

I have seen several articles with views and comments on the affect the new ruling will have, on a basic and a higher rate tax payer. But, I have yet to see anyone explain how this will be implemented in practice by the HMRC. Two options come to mind. 1) The higher rate tax payer will now not get any relief on the BTL mortgage interest (period!) because they are already above the basic tax threshold and have used up their lower rate allowance, in effect will not get any BTL mortgage tax relief? Or, 2) a higher rate tax payer will just get 50% tax relief of what was the case before the ruling kicks in fully, in phases - meaning they will still take the BTL mortgage interest actually incurred, as before, but be able to claim only half of that ((meaning at 20% rather than at 40%)? Views welcome.