How does the latest budget effect buy to let?

Related Articles

• UK Landlords will have to check the immigration status of their tenants
• Landlords could start to raise rents after budget cut to their tax benefits
• Private sector housing landlord speaks out against Labour Party plans to cap rent rises

This Budget was mooted as the last chance for the Chancellor to reverse changes to tax relief for landlords which is set to be cut next month.

But there was no let-up on the measures targeting buy-to-let landlords, who are set for steep increases in the tax they pay on their rental properties from the beginning of April.

In 2015 former Chancellor George Osborne announced plans that mean landlords have to pay tax on turnover, rather than the difference between rental income and mortgage interest.

Currently tax is due on profits at your highest rate of income tax. But between 2017 and 2020 this system will be replaced. All landlords will pay tax on the full amount less tax relief fixed at 20pc.

As a result every mortgaged landlord who pays 40pc or 45pc tax will pay much more - but so will some basic-rate taxpayers too, because the change will push them into the higher-rate tax bracket.

Very wealthy landlords who do not need mortgages are untouched.

"The buy-to-let market has already seen a substantial hit from the second home stamp duty levy and this further strain on landlords will undoubtedly adversely affect the property market," said Glynis Frew, chief executive of Hunters Property. "This could mean landlords opting to come out of the private rented sector, creating reduced supply or increased costs which could again mean an increase in rents.

"The more average rents rise, the more ownership figures fall. This is a bad decision which will affect not only landlords but renters, first time buyers and second steppers.”

Those who are worst affected will see:

● the actual tax they pay on their investment rising twofold or more;

● the tax rate payable rising above 100pc, meaning that more than all of their profit is paid in tax;

● a degree of tax that pushes them into loss, making their investment financially unviable and forcing them to increase rents sharply – or sell.

Here is a worked example assuming the landlord is a higher-rate, 40pc, taxpayer.

NOW

Your buy-to-let earns £20,000 a year and the interest-only mortgage costs £13,000 a year. Tax is due on the difference or profit. So you pay tax on £7,000, meaning £2,800 for HMRC and £4,200 for you.

2020

Tax is now due on your full rental income of £20,000, less a tax credit equivalent to basic-rate tax on the interest.

So you pay 40pc tax on £20,000 (ie £8,000), less the 20pc credit (20pc of £13,000 = £2,600), meaning £5,400 for HMRC and £1,600 for you. Your tax bill has therefore gone up by 93pc.

Now, say Bank Rate – and in turn your mortgage rate – rises by a small fraction, lifting your mortgage cost to £15,000, while your rent remains at £20,000.

You will have to pay £5,000 tax in this scenario, so you make no profit at all.