An hour after the Chancellor delivered his Budget speech on Wednesday I was still recovering from the shock. It felt like he’d pulled the rug from under landlords, rolled us up in it and dumped us by the edge of the road.
In announcing that tax relief on buy-to-let mortgages is to be limited to the basic rate of tax and the 10 percent wear and tear tax allowance for furnished properties is to be withdrawn, George Osborne sent out a clear message that he wants to halt or at least slow the growth of the buy-to-let market and he’s going to do that through taxation.
And I think his measures will have some of the desired effect, the reduction in tax relief bound to make BTL seems a less attractive investment for the highest earners, especially those with low-yield properties who could end up paying tax on a loss.
Even those of us who are lower rate taxpayers will mourn the axing of the 10 percent wear and tear allowance next April. Whilst it might be fair that in future landlords will only be able to get tax relief on money they’ve actually spent, it seems harsh that there’s no tax relief when we furnish our properties in the first place, only when we buy replacement items. Also, we’ll have to itemise and keep receipts for every piece of replacement furniture we buy, which has left me slumped over my desk in despair. There’s nothing I hate more than paperwork.
But the tax reforms announced this week could have been worse. Some landlord organisations feared the Government would abolish mortgage interest tax relief completely and that the cut would be immediate. In fact, mortgage interest tax relief will be reduced over a four-year period, starting in April 2017, and it will remain at 20 percent, the basic rate of tax, from 2020.
This means that only higher rate taxpayers will be affected. Zoopla estimated that, on average, landlords will lose up to £2,000 a year.
As we’ve been given two years to prepare, I expect to see many higher rate taxpayers who’ve bought rental properties with spouses or partners on a lower rate of tax shifting the bulk of rental income to them to try to dodge the impending increase in tax.
Others will probably scale back investment plans, consolidate portfolios and offload their worst performing rentals. For the rest of us who do decide to hang on to our properties – and I expect the majority will - it makes a rise in mortgage interest rates much more of a concern, especially from 2020.
The fact that the Chancellor is also reducing tax relief on dividends will also hit landlords who have set up companies to acquire rental properties. What’s more worrying though is what other nasty surprises the George Osborne has up his sleeve.
Now that he’s shown he’s prepared to treat BTL as an exceptional case, introducing a different tax regime for landlords than the one that exists for all other types of business which are not limited on the amount of tax relief they receive on loans, I’m worried about what he’s planning next.
Could removal of the capital gains tax allowance for rental properties or a higher rate of CGT for landlords be on the cards? Or could the Chancellor decide to remove mortgage interest rate relief completely after all?
Call me an optimist, but I think that BTL will still prove to be a good long-term investment, after all, most landlords are in it for the capital growth, not for rental income, but we have to be able to afford to hold on to our properties for several years in order to make a decent return. That means we’re going to have to be savvier investors, hunting out properties with the best yields as well as looking at ways to cut our costs to make sure we thrive in this new, iniquitous tax regime.