How will the Budget changes to mortgage interest relief for buy-to-let landlords affect you?

Thu 10 Sep 2015

Brian Murphy
Head of Lending at MAB

In the first all-Conservative Budget since 1997, the chancellor George Osborne announced that the amount of tax relief buy-to-let landlords can claim on the interest element of their mortgage payments will be reduced, only though for higher-rate tax payers.

The changes mean that property investors who currently claim top rates of tax relief, of 40% and 45%, will only be able to claim relief in the future at the basic rate of tax, currently 20%. The reason given for this change by the Chancellor is that it will “address unfairness in our taxation of property”

How will the tax changes be implemented?

The withdrawal of the higher-rate reliefs will be phased in over a period of four years, in order to help landlords adjust to the lower relief level, and nothing will happen until April 2017. It will be implemented in four stages.

Stage one

From April 6th 2017, the higher-rate tax relief can still be claimed on the first 75% of your mortgage interest costs. The remaining 25% will have the basic rate of tax relief applied.

Stage two

From April 6th 2018, the amount of tax relief you can claim at the higher rates will drop to 50% of your mortgage interest costs. The remaining 50% will have the basic rate of tax relief applied.

Stage three

From April 6th 2019, the higher-rate tax relief can only be applied to 25% of your mortgage interest costs. The remaining 75% will be at the basic rate.

Stage four

From April 6th 2020, you will only be able to claim tax relief at the basic rate level.

If you have any furnished holiday lets, this restriction will not apply.

These changes will be published and are expected to be passed in the Summer Finance Bill, 2015.

How can you assess the impact these changes will have on you?

The changes won’t take full effect until April 6th 2020, in five years’ time. This gives you time to forward plan so you do not have to suddenly increase rents.

For any landlords currently investing in buy-to-let, or considering expanding their portfolio, it is wise to speak to an independent mortgage adviser to discuss these changes. They should be able to help you understand how the changes will affect your finances and review your current mortgage deals to see if it is possible to re-mortgage and reduce the impact of losing the tax relief. It is also worthwhile talking to a property tax expert to see if there are any other tax breaks you could take advantage of.

There was positive news in the budget for landlords who rent out rooms within their own home. Currently, you can earn up to £4,250 per year letting rooms in a property you live in, without incurring tax. This threshold is going to increase to £7,500 from April 6th 2016.

Your property may be repossessed if you do not keep up repayments on your mortgage.

There will be a fee for mortgage advice. The actual amount you pay will depend upon your circumstances. The fee is up to 1% but a typical fee is 0.3% of the amount borrowed.