DEATH OF THE
BUY-TO-LET?
When
George
Osborne
announced
changes in
the Summer
Budget that
restrict interest
relief for residential
landlords he was clearly hoping that
he could have an impact on the boom
in the buy-to-let market.
Purchasers have been taking
advantage of low interest rates to
increase their portfolios and he
would rather see some of them
acquired by owner occupiers.
The changes do not sit comfortably
with the alignment of property
taxation some years ago with the
general rules for computing trading
profits. After all, most landlords see
themselves as operating a business
albeit one that utilises assets that
could also be viewed as a long term
investment – residential property.
From 6 April 2017 rental profits
will be computed without including
a deduction for interest payments.
Instead, a new tax relief or credit will
be available but this will be restricted
by 2020 to the basic rate of income
tax (currently 20%). The restriction
will be phased in gradually between
2017 and 2020.
The changes will not only hit
higher (40%) and additional rate
(45%) taxpayers as implied in
the announcement but will also
push some basic rate taxpayer’s
income into the higher rate bracket.
Conversely, those not
affected at all include
the very wealthy who
can afford to purchase
property without a
mortgage.
Example
Bob runs a successful business and
pays tax at the additional rate. He
also has a buy to let property with
a mortgage on it that generates net
income (before interest deductions)
of £20,000 per year. His interest
deductions are currently £12,000.
He would pay tax at the moment on
a net profit of £8,000 amounting to
£3,600 and will pocket £4,400.
In 2020 Bob will pay tax on a profit
of £20,000 amounting to £9,000,
but will get a 20% credit on the
interest, £2,400. His net tax bill will
have gone up to £6,600. Bob pockets
just £1,400 per year after tax.
If Bob’s interest payments go up to
£15,000 his “profit after interest” is
just £5,000, however, he will have
to pay tax of £6,000 and will thus
actually make a loss of £1,000!
Worst affected
•In general, all higher rate taxpayers
whose mortgage interest amounts to
75% or more of their rental income
(after other expenses) will see their
returns completely wiped out or
worse, could end up making losses.
•The tax rate payable could in some
cases be more than 100% - more than
all of the profit is paid in tax.
•The investment may become
unviable forcing up rents or pushing
landlords into selling the property.
Complexity
For all the rhetoric about tax
simplification this new measure
introduces additional complexity into
the tax regime for many residential
property owners and will require
them to take careful advice tailored to
their own circumstances.
If you...
•Have brought forward losses
•Operate through a property letting
partnership
•Have a mixed commercial and
residential property portfolios
•Are a partnership with a trading
activity and a let residential property
•Are considering purchasing
residential property through a
company
...plan ahead and take advice.
The changes to relief for costs
incurred in running a buy-to-let
property can have a marked effect on
the viability or operational economics
of a residential property portfolio. It
is important to start planning now for
the new regime!
If you would like to know more please
contact one of our tax specialists:
Catherine Desmond
[email protected]
Jackie Hendley
[email protected]
Richard Stanley
[email protected]
Natasha Smith
[email protected]