Buy-to-let Tax Changes

05 September 2016

Like us, I am sure many of you are still reeling from the Chancellor’s proposed changes to property taxation. Despite out-cry from private landlords through-out the country, plus numerous professional organisations opposing these changes and lobbying the government on our behalf, it would seem our concerns are falling on deaf ears with those in Westminster unlikely to change their minds.

So what does this mean for private landlords? The main changes existing landlords need to be aware of are:

Wear and tear relief

Previously, landlords benefited from a wear and tear allowance for fully furnished properties. Landlords were able to claim back whatever maintenance costs they spent on the property or 10% of their net rents each year, which ever was greater. The intention of this was to provide some relief for the wear and tear of furniture and white goods. This was a particularly helpful and some might say generous deduction which as of the 6th April this year has been replaced with an across the board deduction for actual costs. So for the tax year 2016/17 landlords will not be able to claim the 10% wear and tear and can only deduct for the actual replacement costs of furniture and furnishings. For those landlords that spend over 10% of the net rent a year on wear and tear this will be a welcome change, however I suspect the majority of private landlords will see an increase in taxable profits as a result of this change.

Mortgage Interest Relief

Landlords currently benefit from tax relief on their mortgage interest. Presently any finance/interest costs incurred on any loans or mortgage for buy-to-let property are fully deductible from a landlord’s tax bill. This is due to change as of the 6th April 2017. The amount of mortgage interest relief available will be restricted with relief being completely phased out over the next four years so that by 6th April 2020 there will be no mortgage interest relief available at all. This change is going to have the greatest impact on highly geared properties and is going to increase the tax liability for the majority of private landlords.

So what does this mean for the industry? These tax changes could have a devastating effect on the residential sector. They are likely to significantly increase the number of landlords renting at a loss, causing them to leave the market, further reducing the supply. Similarly, these changes are likely to deter investment in buy-to-let property which will also reduce the supply of rental properties. Tenants are also likely to suffer as a consequence of these changes as it likely landlords will increase rents to offset the losses they will incur and due to the shortage of rental properties these changes will create.

With housebuilding continually falling short of targets to meet demand and failing to alleviate the nation’s housing crisis, we feel these changes are a step in the wrong direction; one that could ultimately result in a reduced supply of rental properties as well as reduced quality of housing stock.

If you would like advice on any of these issues, please do not hesitate to get in touch.

Bellevue Lettings