Unpacking the changes for buy-to-let landlords

George Osborne announced significant changes in the recent budget for buy-to-let landlords. The changes will affect the amount of tax relief landlords are able to claim on their let properties.

Previously, landlords who had acquired a property that was financed by a mortgage, were able to deduct the costs of the mortgage interest when calculating their taxable profit. This left many people in a favourable position, as the interest element of a mortgage was usually quite considerable.

But for many, the relief will be clawed back. Osborne’s announcement means that the amount landlords are able to deduct will be restricted to the basic rate tax band (20%). As the majority of buy-to-let landlords are likely to be higher rate payers, this will affect a lot of people. The higher rate relief will be phased out gradually over a period of 5 years, until 2021 when relief will only be given at the 20% band. It is worth pointing out that this is exactly the same relief that a company would be entitled to, as it mirrors the current corporation tax rate.

The restrictions on claiming mortgage interest were announced in conjunction with changes to the wear and tear allowance. Previously, wear and tear could only be claimed if the residential letting was on a furnished basis. However, the new rules override the importance of whether a property is furnished or unfurnished, as all landlords of residential dwelling houses, no matter what the level of furnishing, will be able to claim the cost of replacing any furnishings. The downside is that the costs have to actually be incurred, whereas before, a flat 10% of the gross rent could be deducted from a furnished letting business.

There was also good news for those looking to rent rooms in their existing house. The ‘rent a room limit’ (the amount an individual can receive from renting a room in their house without paying tax) will increase from £4,250 to £7,000 from April 2016. So if you charge £583 per month for a room in your house, there will be no tax due at all on the rent.

Clearly, the politics behind these changes concerns the current housing shortages. Whilst the government wants to discourage wealthy landlords from profiting from this, it is more than happy for individuals to make use of the space in their existing homes.



Later this year we’ll be hosting a series of seminars on the budget, giving you the opportunity to ask our tax specialists any questions you may have about how the changes will affect you.