Summer Budget 2015 – Landlords Reactions

The Chancellor George Osborne will be restricting mortgage interest tax relief to the basic rate of tax (currently 20%) for Landlords.

In his first budget speech in the first conservative majority government for 18 years he "said it is a budget for working people"

He said the measure will address unfairnesses in property taxation and will be phased in gradually over a four year period from 2017.

For Landlords paying the high rate of tax on incomes above £43,000 at 40%: for every £100,000 borrowed at a mortgage rate of 4% this will cost an extra £66.67 per month.

There are many more policies that will also have a direct affect the Private Rented Sector:

£26,000 cap on benefits reduced to £23,000 in London and £20,000 elsewhere - This is going to hit LHA landlords particularly hard

Working age benefits to be frozen for four years - including tax credits and local housing allowance

18-21-year-olds will not be entitled to claim housing benefit automatically, with a new Earn to Learn obligation.

Rents paid in social housing sector to be reduced by 1% per year for four years

Higher income households are to pay market rents for social housing. Income thresholds of £40,000 in London and £30,00 elsewhere - This will surely make social housing less attractive and increase demand in the PRS

Rent a room tax relief increase to £7500

IHT From 2017, there will be a new £175,000 allowance on homes left to children or grandchildren on top of the existing allowance allowing £1 million to be passed on tax-free.

Non-Doms to pay Inheritance Tax on all Uk property from April 2017 - will these ease the flood of foreign investment into the London market in particular?

Annual tax relief on pension contributions to be limited to £10,000 a year - This will drive people to invest in different forms of assets which could include property

Tax free personal allowance increased to £11,000 from next year

High rate income tax threshold increased to £43,000 from next year

New National Living wage £7.20 per hour and to offset this corporation tax reduced to 19% in 2017 and 18% in 2020 and no NI on National Living wage

Insurance premium tax to increase from 6% to 9.5% this November - Cost of Landlords insurance to increase by 3.5%

Limit of child tax credits and Universal credit to two children after April 2017 for new applicants

New help to buy ISA and housing association Right to Buy

New 8% surcharge on bank profits from January next year to offset a gradual lowering of the Bank Levy over the next 6 years - This is to encourage the Financial sector to stay in London and hence keep the mortgage market strong.

Macro economic statistics:

The economy grew by 3% last year and OBR forecasts growth to be 2.4% in 2015 and at similar levels for the next four years.

The budget deficit has fallen from 10.2% of national income to a forecast of 3.7% in 2015 -2016. £12 billion are to be saved in Welfare and £5 billion in tax evasion and avoidance.

This is a shocking decision by the Chancellor of the Exchequer which unfairly discriminates against landlords who provide valuable housing across Scotland. In other businesses, tax is applied on profit, which is as it should be."

"Although we welcome other measures in the Budget such as reforms to the Rent A Room scheme which will increase supply of affordable rented accommodation, the decision on buy-to-let mortgages means landlords will essentially be taxed for investing in their businesses, something utterly unthinkable in any other sector. As a result of this increase cost and risk to landlords, you may see some within the sector feeling they are forced to increase their rent levels which would obviously have a huge negative impact on tenants.”

“The Scottish Association of Landlords have been working constructively with both Shelter and the Scottish Government to find ways of increasing supply to drive down rent levels in hot-spots across Scotland but this decision by the Chancellor potentially takes the legs away from that valuable partnership working."

"We will be consulting our members, Scottish MPs and MSPs, as well as the Scottish Government and the third sector to find ways of trying to overturn this decision or, at the very least, to mitigate the damage this could cause to our business and to our customers in Scotland.”

https://www.scottishlandlords.com/NewsPolicy/PolicyItem.aspx?ArticleId=322

I believe that the movement in the tax will mean it might be more tax efficient to hold onto property as a limited company depending on where you are in life.

The removal of Tax relief will mean we are paying more tax 20% on the interest payments. Then the reduction of corporation tax. I certainly will be thinking of doing this on my next purchase as I am quite young and do not consider the inheritance tax to be an issue for me presently.

It does seem that the Rent a Room allowances should have been raised many years ago and should have been rising in line with inflation. I do not think that it will have much affect on a wide scale unfortunately.

I agree with John Blackwood. The logic of a different tax rate for loan finance for BTL property is warped. Any other business calculates its profit and it is taxed on the profit. The cost of finance is a clear expense of doing business.

Landlord should be careful however in switching to companies to run their properties. Many self employed converted to companies when Brown introduced a tax free income for companies only to withdraw it later. However if the banks quickly realise that there will be a new company sector for property finance and reduce the silly interest rates for companies, I think I will transfer my properties into a company. Yes the CGT allowance will no longer apply to the sale of the house but instead it will apply to the sale of the company. It could be interesting to see some restructuring of the sector?

I would welcome the thoughts of 118 tax advisors .....

"The budget document revealed that a second raid on landlords’ tax breaks is planned from April 2016, when the current system that allows those to claim 10% of their rent for wear and tear will be scrapped. From that date, landlords will only be able to deduct costs they actually incur. "

Ouch that one hurts!

http://www.theguardian.com/uk-news/2015/jul/08/osborne-buy-to-let-tax-relief-limit-budget

At the risk of sounding naive I do not understand what this is about. Mortgage interest on BTL mortgages has always been a cost of BTL which comes off your profits. Where does this 20% tax rate come info it?

all moves seem to be deterring anyone from bothering to earn more than 43K p.a.
Do we have a conservative or labour government I am beginning to wonder.

Reply to the comment left by "Gary Nock" at "08/07/2015 - 15:27":

Hi Gary,

The mortgage interest will still come off your profits, but you will only be able to claim tax relief at a maximum of 20% not at the rate of tax you actually pay which could be higher eg. 40% or 45%.

I'm suffering from my thick gene this afternoon, so wonder if someone can help me out.
If I pay £5,000 per month in interest at the moment - so £60,000 per year (mostly at a rate of about 2.75%), and if my income is £20,000 per month, and I have a gross annual income of £240,000 - usually, I would put down the £60,000 interest payments as one of my costs, and say, £60,000 on other costs - maintenance, insurance etc., so I would be left with an annual profit of £80,000 (halved, as the business is shared with a partner), which would then be taxed at the basic rate - then would I no longer be able to put the £60,000 in as a cost? - does this new rule about basic tax relief mean that it would now be assumed that £48,000 of this (80%) is part of my profit, even though it isn't? Sorry if I'm getting this all wrong - there's some maths I just can't do (I can never work out what the clocks going forward and backwards mean either!)

Reply to the comment left by "Gary Nock" at "08/07/2015 - 15:27":

If your net rental profits prior to deducting form your mortgage interest are over the limit for 40% tax, then limiting the relief will mean that instead of your earnings dipping below 40% once the mortgage relief has been applied that you will now have to pay 40% on some of that money. If you believe that will not apply to you, notice that the withdrawal of wear and tear from April 2016 will mean your taxable rental income is boosted by an additional 10% gross, as presently wear and tear is deducted before your taxable earnings are calculated