Chancellor George Osborne today dropped two financial hits on landlords during his Summer Budget speech in the House of Commons and hid another one in the paperwork...
Landlords will no longer be able to claim relief on mortgage interest payments based on their personal tax rate. So if you are currently a 45% tax rate payer and claim tax relief at that rate then the relief will drop, from 2017, to 20%. In effect, Osborne has more than halved the tax relief many landlords receive on their mortgage interest.
The good news is that the changes will be not be established in one go, but will be introduced slowly – or tapered – over a four year period starting in April 2017. Some may say this a sign that the Teasury will wait and see what the reaction is before deciding whether to go ahead with the measure at all.
During his speech Osborne labelled mortgage interest relief ‘unfair’ because, he said, landlords were able claim the relief while private home owners were not. Making the somewhat irrelevant comparison between home ownership and running a business may reflect a lack of political will behind this move.
The second tax increase for landlords is the ending of tax relief on dividends. This will affect any landlord who operates their buy-to-let portfolio through a company. Many do this because, until now, it’s been a way to reduce their personal tax liability.
Most paid themselves both via a combination of basic salary and dividends. That way, as long as they didn’t exceed their personal tax threshold of £10,800 then they didn’t pay tax at all (or much less than normal) on their income.
This meant that a director of property company could, for example, reduce their personal tax liability from 40% to approximately 15%.
But Osborne has now closed this loophole. Instead, the first £5,000 of income from dividends is tax free while payments over that will be taxed. There will be three bands, 7.5%, 32.5% and 38.1% depending on how much the dividends you pay yourself are.
Once the Treasury had released the transcript of the speech, it became clear that a third measure against landlords had been omitted from the Commons speech. In addition to the reduction in tax relief on mortgage payments, the 10% annual allowance for wear and tear in furnished properties is also to be abolished in April 2016. Instead landlords will only be able to claim relief against replacement furnishings.
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