The Budget Fails to Reverse the Tax Changes Coming for Landlords

While landlords may have been hoping for a reversal in the upcoming plans to get rid of mortgage interest rate relief, no such reversal was forthcoming in this week’s Budget. Instead, the new plans remain in place, and are set to start being phased in on 6th April this year.

What does this mean for landlords?

Currently, landlords can deduct all the interest they pay on their mortgage from the amount they get from rental income. Come 6th April, this reduces to 75% of the interest. The amount that can be claimed then goes down by a further 25% per tax year. When landlords reach the year 2020-21, no relief can be claimed at all.

Essentially, landlords only ever paid tax on their profits before, just as any business would do. Now, however, tax will be paid on the turnover.

How many landlords will be hit?

Landlords who have a mortgage on a property will be affected by the new ruling. Those without mortgages have nothing to worry about, but those who do have mortgages will likely pay more once the new system comes into force.

Those paying a higher rate of tax will pay more than those on a lower rate, but there could be cases where a landlord may end up with a tax rate exceeding the profit they have made. A lot will depend on individual mortgage costs, but the new tax rules mean those with buy-to-let mortgages will be hit to some extent. Some could pay more than twice the amount they currently do.

Could we see landlords selling up?

This could happen. The new rules will change the situation anyway, but two other factors may also influence what each landlord decides to do. Firstly, rents may come under consideration. If landlords are not making money, they may decide to put rents up so they can still make a profit. Secondly, if they are on a variable rate mortgage, they will be more exposed to rises in interest rates. That could mean the mortgage costs increase, and yet rents could stay the same.

Landlords who discover their profits have been wiped out – or worse, that they are losing money once they have paid their tax bill – are likely to sell one or more properties, possibly leaving the buy-to-let sector altogether.

No mention of the ruling in the Budget

While some would have listened to the Budget in the hope the ruling was reversed, there was no mention of it at all. Yet this won’t just affect landlords. With many people finding it difficult to afford rental prices, let alone trying to buy properties, the possibility of soaring rents could make life more difficult for renters, too.

Perhaps in the end, the only way to determine the actual effect of the tax changes is to see them occur. We may know the net effect long before the ruling comes into effect completely for the tax year 2020-21.

Published on 22 March 2020

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