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.
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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