The Summer Budget announced in July 2015 will affect buy-to-let Landlords up and down the country as the proposed changes start to take effect from April 2017.
Currently, buy-to-let Landlords can deduct several expenses from their rental income. These include mortgage interest repayments. However, the Summer Budget will reduce the amount of tax relief, so a Landlord paying tax (and claiming tax relief) at 40% or 45% will be restricted to only reclaiming relief at the basic rate of 20% from April 2020.
This will have the greatest impact on Landlords who pay the higher rate of tax. At the present time, the rules on tax relief for mortgage interest repayments allow high rate tax-paying Landlords to pay 40 pence or 45 pence less tax in every £1 of interest paid. Once the changes come into effect they will only be able to claim the basic rate of 20 pence back.
It is worthy of note that the Government will also be removing the allowance of 10% tax relief for wear and tear. From April 2016, Landlords will only be allowed to claim tax relief when they actually replace furnishings in the property.
George Osborne said that the changes should ‘create a more level playing-field between those buying a home to let, and those who are buying a home to live in’. This is because unlike buy-to-let Landlords, homebuyers are unable to offset their mortgage interest payments against their taxable income.
Property investors should be starting to think about how they can limit the implications of the tax changes. However, investors can take comfort in the fact that the changes are being phased in over the next 4 years, the first change being set for April 2017. Whilst it is important to consider what options are available to investors, there is time in which to explore these, and indeed to see how the law surrounding this area may be drafted, with the finer detail coming into play nearer the time of the change.
There are a few ways in which we might be able to help you, such as transferring equity to spouses or into a company. Initially we would advise you to seek specialist advice from a tax advisor. We would then work with you and your tax advisor to achieve the maximum amount of tax savings in your circumstances.
This is intended to provide general information about the impending tax changes on buy-to let properties. It is not intended to be comprehensive or provide specific legal or tax advice and should therefore not be acted or relied upon. If specific tax advice is required we would be happy to recommend a tax specialist.