Buy To Let Updated:
One of the announcements of George Osborne's Summer Budget was the cap to the amount landlords can claim on mortgage interest payments, but just what does it mean for landlords? We take a closer look.
In a nutshell, the Chancellor announced that tax relief would be restricted on buy-to-let mortgages. As it stands, landlords can deduct their costs, including mortgage interest, from their profits before they pay tax, meaning that some are benefiting from tax relief of between 40 and 45% (as it's based on the top rate of tax they pay). This will be gradually lowered to 20% – the basic rate of tax – over a four-year period from 2017.
The move has been designed to level the playing field between landlords and typical homebuyers, it was stated, as the current system is thought to give an unfair advantage to those investing in buy-to-let. And that's not the only thing to have changed – the "wear and tear allowance", which allows landlords to reduce the tax they pay by claiming 10% of their rent for wear and tear, will also be scrapped, to be replaced by a system that only allows them to get tax relief when they replace furnishings.
"Buy-to-let landlords have a huge advantage in the market as they can offset their mortgage interest payments against their income, whereas homebuyers cannot," said the Chancellor. "And the better off the landlord, the more tax relief they get."
This has arguably led to the huge rise in buy-to-let mortgage activity in recent years, with the sector now accounting for around 15% of the entire mortgage market. The Bank of England expressed concern that the sector was expanding too rapidly and could pose a risk to the UK's financial stability, hence the rule change, but now there are other concerns – either that the appeal of investing in buy-to-let will be seriously reduced, or that those already in the sector will raise rents as they try to recoup costs.
At the very least, it'll mean landlords will need to factor the increased tax payments into their calculations, as it could well affect the amount of income they receive. For those who rely on that income as a livelihood, the cuts to tax relief could come as an even bigger blow.
Paul Smee of the Council of Mortgage Lenders said that the "four-year timetable does at least reduce the risk of sudden market shocks", but many will need to start preparing. At the most basic of levels, it makes finding suitable buy-to-let mortgages even more important, because the lower your mortgage rate, the lower your interest payments – and the less tax you'll have to pay.
Compare buy-to-let mortgages to keep your tax liability as low as possible
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