In the summer budget we saw the Chancellor of the Exchequer make dramatic changes to the tax relief available to buy to let landlords.
The advice previously given to landlords was to leverage against your existing investment properties to purchase further properties increasing your investment. However with the new changes, that will prove more difficult, many tax advisers suggesting either selling your existing property to reduce your debt or transferring property into a company (which would incur other taxes i.e. Stamp duty).
There are two main changes to tax relief borne from the budget, first, the ‘wear and tear’ tax relief at present is allowable at a rate of 10%; this tax relief on replacing carpets, curtains, furniture or white goods, whether you replace goods or not. From April 2016 this will be replaced by a deduction for actual costs of replacing furnishings.
The second impact of the budget is the reduction in the relief for the interest and costs on the lending used to acquire or furnish the property. Currently there is a 100% tax relief on the interest accrued on a mortgage, including any associated costs in purchasing the property (for example, arrangement fee). From 2017 this tax relief will be phased out and replaced with a basic rate tax relief.
Therefore in 2017-2018 you will be able to claim 75% of the finance costs at the full rate and 25% of the costs at the basic rate; by 2020 – 2021 all financing costs will be reduced to the basic rate tax relief.
This does provide a huge consideration for landlords who have borrowed close to 75% of the value of the property, especially in London where the rental income has not kept pace with value of the property.
For existing landlords a review of your portfolio would help to mitigate any issues that may arise by these changes and for those considering purchasing a buy to let property speaking to an adviser will assist in placing you in the best position to reduce the changes impacting your investment.