The Summer Budget and the Impact on Property Investors’ Pockets

What do the tax relief reductions and changes to the wear and tear allowance mean for landlords? We take a closer look at the real impact of the recent Budget. George Osborne’s Summer Budget contained a number of surprises, but few will have been quite as unwelcome as the decision to cut the rate of mortgage tax relief from 40 or 45 percent to 20 percent for buy-to-let landlords. The move, which will be phased in from April 2017, will have a real impact on the underlying yield landlords can expect from buy-to-let properties. However, experts predict many of the UK’s two million buy-to-let landlords will simply switch to cheaper, albeit riskier two-year fixed rate mortgage deals to cut interest costs and mitigate the effect on profit.

**The lowdown on the tax relief changes**

With the maximum tax relief on the interest payments of buy-to-let mortgages being cut
to the basic rate, many higher-rate taxpaying landlords will be forced to recalculate their
investments. The move will have the following impact on a typical £200,000 property
investment:

Property value: £200,000
Interest-only mortgage: £150,000 (75 percent LTV)
Rent: £800 per month

**Current annual position**

? Rental income – £9,600
? Mortgage – £6,000
? Net income – £3,600
? Taxable at 40 percent of rental income – £3,840
? Minus 40 percent of mortgage interest payment – £2,400
? Tax payable – £1,440
? Net profit – £2,160

**New position**

? Rental income – £9,600
? Mortgage – £6,000
? Net income £3,600
? Taxable at 40 percent of rental income – £3,840
? Minus 40 percent of mortgage interest payment – £2,400
? Tax payable – £2,640
? Net profit – £960

**Landlords could hold their properties in limited companies**

Experts have suggested one method landlords might use to reduce the impact of this
measure is to build their property portfolio within a limited company structure. The new
tax restrictions apply to individuals owning properties, and companies are not affected.
Although there will be some financing (fewer lenders) and tax issues to be considered, this
could prove to be an effective workaround for long term landlords. Some landlords may
also choose to shift the ownership of a property to a spouse who may be subject to a
lower a rate of tax.

**Wear and tear tax allowance to be scrapped**

In the second of the government’s raids on landlords’ tax relief, From April 2016, landlords
will no longer be entitled to automatically claim 10 percent of the rent against wear and
tear costs. Instead, they will only be able to deduct costs they actually incur.

This important change went largely unnoticed given the headline Budget announcement
on the restriction of mortgage interest tax relief. The Budget small print does not say how
the new wear and tear regime will work, it simply says: “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.”

**Buy-to-let property remains a lucrative investment opportunity**

While Mr Osborne’s shake up of tax relief will effectively double the cost of borrowing for
those paying the highest rate of tax, landlords will have almost six years to prepare for
these changes, with the basic rate not applying in full until 2020-21.

Under the withdrawal of interest relief, in 2017-18, the existing relief rules will apply to 75
percent of landlords’ finance costs, with the remaining 25 percent subject to the basic rate
reduction. In the following three years the proportion will change to 50:50, and then
25:75, before the basic rate applies in full.

This move will actually come as good news to many landlords who feared the relief would
be abolished altogether. And, against the backdrop of a buy-to-let mortgage price war,
and rents that are continuing to rise in many areas, buy-to-let property remains an
attractive investment.

For help maximising your yield and minimising void times on your property investment in
Camberley and the surrounding area, please get in touch with Martin & Co. Camberley, today.

t: 01276 691510
e: giles.mugford@martinco.com
w: www.martinco.com/lettingsagents/camberley