insideKENT Magazine Issue 45 - December 2015 | Page 165

BUSINESS TAX CHANGES TO INCREASE COSTS FOR BUY-TO-LET LANDLORDS MANY LANDLORDS USING BUY-TO-LET MORTGAGES ARE GOING TO SEE THEIR COSTS RISE IN THE NEXT FEW YEARS AS THE GOVERNMENT REDUCES THE LEVEL AT WHICH THEY CAN CLAIM TAX RELIEF. The change, announced in the July Budget, could affect all landlords claiming loan interest. Currently the full finance costs related to the purchase of your property (such as loan interest and arrangement fees) are allowable when computing your rental profits, and therefore get relief at your marginal rate, whether this is 20%, 40% or 45%. From April 2017, however, this will be phased out, so that all tax relief on loan interest will be capped at 20% in the future. The phasing will take three years. In finance year 2017/18, 75% of allowable costs will be eligible for relief under the current rules, with the remainder being treated as a 20% tax reducer. In 2018/19 this will reduce to 50%, then 25% in 2019/20. From April 2020, all finance costs will get relief at the standard rate. Whilst those taxpayers currently paying tax at 40% or 45% will see a direct increase in their annual tax bill, there may also be implications for basic rate taxpayers, as this could push their income into the higher rate or affect any state benefits being received. The government says this will bring landlords more into line with private homeowners who lost mortgage interest relief 15 years ago. The National Landlords Association reckons that a landlord paying higher-rate tax will see yields fall from an average of 4.9% to 4.3% as a result. Although the changes don’t bite for well over a year, canny landlords will be doing their sums already, reviewing plans and projections for income and profit in the light of the changes, and making sure they are still on course for an acceptable return. Simply increasing rents might seem an obvious solution, but it is a competitive market and this might not be an option for many. Non-essential refurbishments to properties can often justify higher rents, but landlords need to balance these carefully to be sure that the potential income justifies the costs. If a landlord’s spouse is not working, transferring rental income to take advantage of the spouse’s tax allowance might help. Investing via a company would enable a landlord to take advantage of planned reductions in Corporation Tax. 165 In a further change, the Wear and Tear Allowance is being replaced. Up to now landlords could automatically write off 10% of rental profits to reflect wear and tear. From April 2016, tax relief will only be permissible for costs actually incurred in replacing furnishings. The government is consulting on the details of how this will work in practice. To find out more, email Partner, Rick Schofield, at [email protected] or call on 01233 629255. www.wilkinskennedy.com