A tax change revealed by George Osborne in the 2015 budget has dealt a huge blow to landlords, as a vital tax relief has been removed. The result is that thousands of buy-to-let landlords will now pay far more in tax as they will only be able to claim tax relief at the basic rate of tax, which is currently 20 per cent. This could be of serious concern for landlords, as the change could render their rentals to a state of unprofitability.
Currently the interest payments made on mortgages by a landlord is a valid deductible expense, which means that landlords only pay tax on his or her profits. At the moment, for landlords who fall into the highest tax bracket, he or she can claim tax relief on that level, currently 45 per cent. This will soon change and tax relief will only be able to be claimed at the standard rate of 20 per cent.
The Chancellor has claimed the move will ‘level the playing field’ according to Thisismoney.co.uk and the change will be phased in over a four year period from April 2017. This change in tax relief will result in landlords owing a lot more money each tax year in Income Tax. For many landlords this could even make their business unprofitable.
The changes in rates will affect all but the very wealthy who do not need to take out mortgages for their rental properties. Even the lower earners could be hit, as the changes could push them into a higher tax bracket than the current rates would.
Generally those who have high levels of borrowing to support their rental portfolios may struggle to turn a profit when the income tax changes come into effect. The struggle for profit making could be made even worse if and when interest rates begin to rise again. Some analysts are suggesting that this may cause landlords to sell up entirely, or transfer their business into a limited company.
In the 2017-18 tax year, 25% of financial costs will be subject to the new tax relief criteria, increasing to 50% in the 2018-19 tax year, 75% in 2019-20 before fully implementing from the 2020 tax year onwards.
Still unsure how these changes could affect you? Here is a handy calculator from The Telegraph that will help you work out the costs over the next five years, and help you gauge how these tax relief changes may affect you.