By Judith Loeffler

Budget-summer-2015

The Summer Budget 2015 announced by Chancellor George Osborne last week held some unpleasant surprises for buy to let landlords:

As of April 2016 landlords of furnished rental properties will no longer be able to claim a blanket 10% of rental income as fair wear and tear allowance per year. The Summer Budget¬†outlines: ‘Currently, landlords of furnished properties can deduct 10% of their rent from their profit to account for wear and tear, irrespective of their expenditure. This means landlords can reduce their tax liability even when they have not improved the property. From April 2016, the government will replace this allowance with a new system that enables all landlords of residential property to only deduct costs they actually incur.’

An even bigger blow was the announcement that mortgage interest relief would be restricted: Currently landlords of buy to let properties can claim tax relief on mortgage interest payments and this can be claimed at the higher rate of tax that is paid ie up to 45%.¬†This is being reduced so only a 20% relief can be claimed on the mortgage interest expense, independent of a landlord’s marginal tax rate.

It is being phased in over a 4 year period starting April 2017. The declared intention of this measure is to shift the balance in between landlords and homeowners: ‘Mortgage Interest Relief was withdrawn from homeowners 15 years ago. However, landlords still receive the relief. The ability to deduct these costs puts investing in a rental property at an advantage.’

In his speech, Chancellor George Osborne summarised the rationale for this decision:
‘Buy-to-let landlords have a huge advantage in the market as they can offset their mortgage interest payments against their income, whereas homebuyers cannot.
And the better-off the landlord, the more tax relief they get.
For the wealthiest, every pound of mortgage interest costs they incur, they get 45p back from the taxpayer.
All this has contributed to the rapid growth in buy-to-let properties, which now account for over 15% of new mortgages, something the Bank of England warned us last week could pose a risk to our financial stability.’

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