When George Osbourne used his summer budget to deliver a sizeable cut to the mortgage interest relief buy-to-let landlords are able to claim, it sparked considerable consternation in the landlord community.
The news that the tax relief threshold for private landlords is to be reduced 20%, down from 45% for the wealthiest , was hardly welcome. However, with the changes not to be implemented until April 2017, there is at least plenty of time to prepare.
In fact, the first change which landlords will have to tackle, and one which largely slipped under the radar amidst the fallout surrounding the headline-grabbing slash in mortgage interest tax relief, is the abolition of the ‘wear and tear’ allowance . This is the allowance which entitles landlords to a 10% tax break for wear and tear of their properties.
Of the upcoming changes facing landlords, this is the first and will be introduced from April next year.
As things stand, landlords can deduct 10% of rent from their profit to account for wear and tear. The Government has announced that this is set to change, with a new system introduced whereby landlords will only be able to deduct maintenance and refurbishment costs which they actually incur.
While this is a development which has received considerably less media attention than other aspects of the Chancellor’s announcement, it is certainly something which buy-to-let landlords will want to pay close attention to as it will affect their taxable profits.
Turning attention back to changes in mortgage interest relief, we can see that now the initial shockwaves from the announcement have begun to dissipate, the outlook may not be as bad as many buy-to-let landlords had initially feared.
Once the new regulation is implemented, change will be incremental. From April 2017-18 existing rules change so that landlords will only be able to take advantage of the current tax relief threshold on 75% of their finance costs.
The year after this will change to a 50:50 ratio, then 25:75 the following year before finally settling at the basic rate of all 20% for all landlords in 2020-21 . That means it will be six years before the full weight of the changes will be felt by private landlords.
So there’s no need for landlords to panic. Rather than a ‘bombshell’ the changes in front of landlords are better described as gradual change. In fact, there are a number of opportunities which landlords can be weighing up to mitigate the effects incoming tax changes will have on them.
One option for landlords is to register their property portfolio as a limited company . Doing so would allow mortgage interest payments to be claimed as a business expense, negating the impact of tax relief changes and allowing them to continue receiving full benefit.
The fact that the Government is cutting corporation tax to 19% in 2017 and 18% in 2020 makes this an attractive proposition further still. Those landlords who do
decide to establish their buy-to-let portfolio as a business will be able to take money out of that business as a dividend, £5,000 of which will be able to be taken tax free from next year.
Re-mortgaging property to secure a more favourable rate has been put forward as an another potential solutions for landlords and there is of course the possibility that landlords may increase the rents they charge to offset the drop in profits which mortgage interest tax relief changes will force them to incur.
So, as we can see, there’s plenty of options open to landlords as they adjust to the implications of George Osbourne’s latest budget.
While the Chancellor’s move to supposedly level the field between landlords and homeowners may not be the news buy-to-let landlords wanted, it’s not calamity for the industry which a cursory glance at the headlines might have suggested.