In the run up to the July Budget there were a number of stories in the press about the generosity of the tax treatment enjoyed by buy-to-let landlords. Whether or not these were planted by the Treasury, it is probably no coincidence that Mr Osborne chose to turn to the sector to raise some additional revenues.
One of the key attractions of investing in property as opposed to other assets is that the interest on borrowings to buy property is tax-relievable against the income generated. At current interest rates and yields, this has encouraged landlords to borrow as much as possible, thereby increasing the size of their portfolio and/or reducing their tax bill. Mr Osborne has now sounded a death knell for this technique by announcing that over the four years from April 2017, for individual investors, he will phase in a reduction in the rate of tax relief on interest to basic rate. For higher and additional rate taxpayers this could significantly increase their tax bill on buy-to-let investments – currently interest often offsets a large part of the rental income.
The other change for buy-to-let – from 2016/17 onwards – will be the replacement of the 10% wear and tear allowance for furnished lettings with a new relief that allows the actual costs of replacing furnishings to be deducted. In practice this relief will be worth less than the current allowance and will mean that the landlord has to incur real pounds and pence expenditure to claim it.
If you have been considering buy-to-let, these changes mean you should review whether it is still the most appropriate form of investment, particularly when the other changes to savings taxation are taken into account.