The recent Summer Budget 2015 contained one or two unpleasant surprises, especially if you are a landlord and liable to higher rate tax.
Chancellor George Osborne announced that the Government will restrict the amount that landlords can currently claim on loan interest payments from April 2017. According to the Chancellor, this will “create a more level playing field between those buying a home to let and those buying a home to live in”.
Currently, landlords who buy a property for the purposes of letting it out can deduct certain expenses from any rental income they receive. One of the most prominent expenses, if not the largest single expense, tends to be the interest on the loan (this is not to be confused with any repayment of capital, which is not an allowable deduction).
Under the new rules, which will be phased in over a four-year period from April 2017, the amount that landlords can claim tax relief on will be restricted to the basic rate of tax, which is currently 20%.
Compare this to the current rules, where landlords are able to claim tax relief on their loan interest payments at their marginal rate of tax, which is effectively the rate of tax they pay. This means that if you are a higher rate taxpayer, you can receive 40% tax relief on any mortgage interest being paid.
Under the new rules the rate will be restricted to 20%, regardless of the landlord’s marginal rate of tax.
Now, a letting activity that has a low level of interest in relation to the borrowings may not be significantly affected by the new rules. However, any landlords with a number of “buy to let” properties who have previously re-mortgaged to utilise equity and thereby free up capital to expand their property portfolio, will face an unwelcome surprise.
Additionally it is proposed that the 10% ‘wear and tear’ allowance will be abolished for landlords of furnished residential property, to be replaced by a ‘replacement furniture relief’.
If you are concerned that you may be effected by any of the above changes and would like to understand how they will affect your tax position, please contact our Tax Experts on 0845 177 5500 or use our on-line contact form for a free initial consultation.