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Landlords face tax relief axe
Wealthier landlords have been told by the Chancellor George Osborne that the tax relief advantages they currently enjoy are to be reduced.
Unlike other homeowners, individual landlords can deduct their costs, including mortgage interest, from their profits before they pay tax.
Before the Budget 2015 announcement, wealthier landlords received tax relief at 40% and 45% but by April 2020 this tax relief on mortgage interest payments will be restricted to 20% for all individuals.
In addition, from April 2016, the ‘wear and tear allowance’, which allows landlords to reduce the tax they pay (regardless of whether they replace furnishings in their property) will also be replaced by a new system that only allows them to get tax relief where costs are incurred.
There were also changes announced for those who rent rooms in their homes to lodgers. Currently these individuals can earn £4,250 tax-free from lodgers each year but this is now set to increase to £7,500.
Sean McCann, Chartered Financial Planner at NFU Mutual, said: “The reduction in Income Tax relief on buy to let properties will be a cause for concern for many higher rate tax-paying landlords as they will face higher tax bills in the future. From 2017, Income Tax relief will be reduced to 20% over a four-year period on buy to let properties.
“Furthermore, buy to let owners can currently deduct 10% of their rent from their profits to account for wear and tear, even if they do not spend anything on replacing furnishings or equipment in the property. From 2016 they will lose this ability and only actual spending will be eligible to offset against rental income with records required.
“These cuts may reduce the appeal of investment buy to let property and anyone looking at alternatives should carefully consider their options.”
You need to know
Tax can be complex and depends on your individual circumstances. Tax laws may change.
Wealthier landlords have been told by the Chancellor George Osborne that the tax relief advantages they currently enjoy are to be reduced.
Unlike other homeowners, individual landlords can deduct their costs, including mortgage interest, from their profits before they pay tax.
Before the Budget 2015 announcement, wealthier landlords received tax relief at 40% and 45% but by April 2020 this tax relief on mortgage interest payments will be restricted to 20% for all individuals.
In addition, from April 2016, the ‘wear and tear allowance’, which allows landlords to reduce the tax they pay (regardless of whether they replace furnishings in their property) will also be replaced by a new system that only allows them to get tax relief where costs are incurred.
There were also changes announced for those who rent rooms in their homes to lodgers. Currently these individuals can earn £4,250 tax-free from lodgers each year but this is now set to increase to £7,500.
Sean McCann, Chartered Financial Planner at NFU Mutual, said: “The reduction in Income Tax relief on buy to let properties will be a cause for concern for many higher rate tax-paying landlords as they will face higher tax bills in the future. From 2017, Income Tax relief will be reduced to 20% over a four-year period on buy to let properties.
“Furthermore, buy to let owners can currently deduct 10% of their rent from their profits to account for wear and tear, even if they do not spend anything on replacing furnishings or equipment in the property. From 2016 they will lose this ability and only actual spending will be eligible to offset against rental income with records required.
“These cuts may reduce the appeal of investment buy to let property and anyone looking at alternatives should carefully consider their options.”
You need to know
Tax can be complex and depends on your individual circumstances. Tax laws may change.