Landlords Beware! Tax Bomb Expected To Affect 6 Out Of 10 Landlords

An overhaul to tax relief for residential landlords could be bad news for investors

The summer 2015 Budget sent shockwaves across the UK’s property investment sector.

From 2017, a new policy will be introduced which will reduce the amount of tax relief landlords can claim.

Currently, buy-to-let landlords can claim tax relief up to 45% however, this figure will be cut to a maximum of 20% in a move which will be phased in from 2017.

The new regime will mean that higher-rate taxpayers who own buy-to-let houses with a mortgage will pay more tax. Basic-rate tax payers will also feel the squeeze, as changes may nudge them into the higher-rate tax bracket.

Landlords Beware! Tax Bomb Expected To Affect 6 Out Of 10 Landlords

The policy won’t be fully phased in until 2020 however, may landlords could see their tax relief drop by 50%.

Effect on the buy-to-let market

The introduction of this new policy has had a widespread effect on the market, with many landlords expected to sell up or to increase rents to cover their losses.

A survey by Residential Landlords Association (RLA) has found that around 60 per cent of respondents will be pushed into a higher tax bracket once the policy is rolled out.

David Smith policy director at RLA commented that according the survey the landlords currently pay the basic rate of income tax. They will consider if it is worth continuing in the market.

Rising mortgage rates (expected in the second half of 2016) coupled with rising taxes will reduce many people’s investment returns.

What can landlords do?

Landlords have until 2017 until the policy comes into play. UK property company, Experience Invest suggest that property investors should make the most of this time while it lasts.

“Landlords have until 2017 before any changes are made. Mortgage interest is entirely tax deductible until then and people should take advantage of this. If you need to make any repairs on your property, now is the time do so. If you can add value to the property now, why not put money into renovations now while it is tax deductible,” a spokesperson commented.

The industry is yet to see whether the changes to the tax system will discourage buy-to-let property investors however, many experts believe than most landlords will increase their rents to cover their losses.