Media Centre

4th April 2016
Tightening the Screws on Buy to Let Investors

Buy to let

Within the October 2015 budget, Chancellor George Osborne detailed a number of significant changes in the tax regime for buy-to-let landlords which will potentially reduce the financial returns of buy-to-let property.

In an effort to help first-time buyers in the property market, the Chancellor has made the following changes:

  • Tax relief for landlords on any mortgage interest they pay will be reduced and phased in, so that from April 6th 2020 higher rate (and additional rate) tax payers will only be able to claim basic rate tax credit of 20% rather than the current 40% (45%). This is best demonstrated by way of example: A landlord paying tax at 40% has an 80% loan-to-value mortgage. He gets £10,000 in rent and pays £8,000 in interest. On his £2,000 profit he currently pays 40% of £2,000 (£800) leaving him a net gain of £1,200. However, come 2020, his tax bill will be calculated on his turnover minus the 20%. And 40% of his £10,000 turnover is £4,000. The relief comes to 20% of the interest (£8,000 × 20 per cent = £1,600). The result is a £2,400 tax bill. Add that to his mortgage interest and you will see that his annual profit of £1,200 has turned into an annual loss of £400.
  • Expenditure on wear-and-tear, which is allowed to be offset against rental income to reduce taxable profits, will be restricted to actual spend incurred for this. To date, landlords have been allowed to claim an allowance equal to 10% of rental income for wear-and-tear.
  • From April 2016, an additional 3% Stamp Duty (on top of current Stamp Duty rates) will be payable on property purchases by landlords and for buyers of second homes. For a buy-to-let or second home with a purchase price of £250,000, this equates to an additional £7,500 in Stamp Duty Land Tax.
  • From 2019, any capital gains/profit as a result of the sale of property other than a principle private residence (your main home) will have to be paid to HMRC within 30 days of completion of sale.
  • The rent-a-room income allowance will also increase from £4,250 to £7,500 from April 2016.

These changes mean that the returns for buy-to-let investors are now significantly reduced, bringing into question the validity of buy-to-let as an investment. If these changes will affect you and you would like to discuss their possible impact, please do not hesitate to speak with your BRI contact.