BUDGET 2015: Mortgage interest relief on residential property is to be restricted to the basic rate of income tax.
In his summer Budget chancellor George Osborne said that buy-to-let landlords’ ability to offset mortgage interest against income when homeowners can’t was a major unfairness in property taxation.
He said the discrepancy had contributed to the rapid growth of buy to let, which could pose a risk to the UK’s stability.
In his Budget Osborne pointed out that tax relief for finance costs was particularly beneficial for wealthier landlords with larger incomes, as every £1 of finance cost they incur allowed them to pay 40p or 45p less tax.
The changes will be phased in over four years starting in April 2017.
The government has also reformed how landlords account for the costs they incur in improving and maintaining rental property. Currently, landlords of furnished properties can deduct 10% of their rent from their profit to account for wear and tear, irrespective of their expenditure. From April 2016 landlords of residential property will be able deduct costs only when they actually incur.
Although the restrictions will not come into force for at least another year, they are likely to have a major impact on the buy-to-let market.
Phil Nicklin, real estate tax partner at Deloitte, said: “This measure will almost double the effective cost of borrowing for a taxpayer on the highest rate of tax. Currently interest payments of £100 only cost £55 after tax relief, but will cost £80 from 2020. A landlord who borrows at even a modest level might end up paying more in tax than he makes in profit.”
