Summer Budget buy-to-let tax restrictions

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18 Aug 2015

How will the new buy-to-let tax restrictions affect you?

Author: Peter Fuller

Chancellor George Osborne announced in the Summer Budget that mortgage interest tax relief will be restricted to 20% for buy-to-let landlords. This will affect some landlords more than others, so Romans Lettings has put this announcement into perspective.

First and foremost over two thirds of property in the residential rental sector is mortgage free, so only 31% of landlords will be affected by this change in any way.

Furthermore, this tax relief only affects those landlords who are higher rate tax payers, so not even every landlord with a buy-to-let mortgage will notice a change.

On top of this, the restriction in the relief is to gradually be phased in:

Stage One
From 6th April 2017, the higher-rate tax relief can still be claimed on the first 75% of your mortgage interest costs. The remaining 25% will have the basic rate of tax relief applied.

Stage Two
From 6th April 2018, the amount of tax relief you can claim at the higher rates will drop to 50% of your mortgage interest costs. The remaining 50% will have the basic rate of tax relief applied.

Stage Three
From 6th April 2019, the higher-rate tax relief can only be applied to 25% of your mortgage interest costs. The remaining 75% will be at the basic rate.

Stage Four
From 6th April 2020, you will only be able to claim tax relief at the basic rate level.

These changes will be published and are expected to be passed in the 2015 Summer Finance Bill.

Interest tax relief chart

When the phased measure is fully introduced in 2020, for the landlords that fall into the 45% tax bracket, interest payments of £100 will cost £80 after tax relief, rather than the £55 it costs currently.

“Despite this new tax relief revision, the UK, and particularly the South East, remains an extremely attractive option for property investors” comments Peter Fuller FARLA, Managing Director of Lettings at Romans, “with strong capital growth predicted over the next five years, demand from tenants and lack of supply driving rental prices up, and the ongoing low buy-to-let mortgage rates available.”

New research from Barclays Mortgages suggests that landlords haved shrugged off the tax changes, with less than one in four even considering selling their buy-to-let investments, and seven out of 10 describing the current market as 'buoyant'.

In addition, from April 2016, the ‘wear and tear allowance’, which allows landlords to reduce the tax they pay (regardless of whether they replace furnishings in their property) will also be replaced by a new system that only allows them to get tax relief when they replace furnishings.

For any landlords currently investing in property, or considering expanding their portfolio, it is wise to speak to an independent mortgage adviser to discuss these changes.

They should be able to help you understand how the changes will affect your finances and review your current mortgage deals to see if it is possible to re-mortgage and reduce the impact of losing the tax relief.

It is also worth talking to a property tax expert to see if there are any other tax breaks you could take advantage of.

To find out how this will affect you talk to your tax advisor, or for more information about local buy-to-let opportunities arrange an appointment with the lettings investment team at your local Romans branch by calling 01344 985 699.

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