George Osborne’s first Budget speech contained a nasty, and unexpected, surprise for many Buy to Let landlords.
The change will push up the tax paid by thousands of property investors. So what is changing and how much will it cost you? Read on to find out.
Many landlords borrow money to finance the purchase of their investment properties. Apart from the fact interest rates are currently extremely low; investors have been able to offset the interest they pay on Buy to Let mortgages against any income received. This has the effect of reducing the net profit made and consequently the tax paid.
To take a simple example.
If a property is rented for say £500 per month, equivalent to £6,000 per year, and interest charges on a Buy to Let mortgage were £300 per month or £3,600 per year, then tax would only be paid on the difference i.e. £200 per month or £2,400 per year.
Yes, we know this is a simple example, there are other deductions which can be made too before a taxable profit is arrived at. However, it illustrates the current situation for landlords.
For a basic rate taxpayer in this example, the net cost of a mortgage repayment of £300 per month is reduced to £240; for a higher rate taxpayer that is cut further to £180.
What’s changing?
The Chancellor believes the current system is unfair and disadvantages owner occupiers and would-be first time buyers.
He therefore intends to reduce the maximum level of tax-relief which can be claimed.
The system of offsetting interest payments against rental income will continue, but will be capped at the basic tax rate of 20%; increasing the bill for higher rate taxpayers.
The changes will be phased in over a four year period starting in April 2017.
In our example the changes, once fully implemented, would cost a higher rate taxpayer £60 per month, equivalent to £720 per year.
What could the effects be?
Following the announcement there has been little consensus as to how the change will affect the property market.
Many experts are predicting that landlords will look to put up rents to offset the cost of the changes. However, others believe that with rents close to an all-time high in many parts of the UK, hard pushed renters will simply find any increase unaffordable.
Other commentators have suggested that the changes could spark a sell off by landlords who will then look at alternative investment options. A rise in interest rates would also make this more likely.
We may also see some landlords change their property portfolio so it is owned by a limited company, which are not affected by these changes. However, this is not as simple as it sounds. To begin with Capital Gains Tax (CGT) may be payable when the property is transferred into the limited company, whilst there are less options for borrowing money.
We’re here to help
If you are worried by these changes we’re here to help.
Call Sarah or Bev today on 0115 933 8433, alternatively email info@investmentsense.co.uk
