The budget rules on buy to let explained

Landlords who borrowed to invest in buy to lets may be considerably worse off under proposals announced in the budget as tax relief will be restricted on interest payments and other finance costs. Relief will in future no longer be deducted from the rental income but will instead be allowed as a basic rate tax deduction.

The changes will be phased in over a four year period from April 2017

• From 6 April 2017, 75% of finance costs can be claimed fully as currently allowed, with the remaining 25% being available as a basic rate deduction;
• From 6 April 2018, 50% can be claimed fully, and 50% as a basic rate deduction;
• From 6 April 2019, 25% can be claimed fully, and 75% as a basic rate deduction;
• From 6 April 2020, all finance costs to be claimed as a basic rate deduction.

Whilst landlords who pay tax only at the basic tax rate will be unaffected by the changes, many more landlords may suddenly find they become higher rate tax payers as this will be determined on their rental income before deducting interest payments.

Landlords with multiple properties could face significantly higher tax liabilities as a result of the interest restriction.

Another change coming into force next April is the removal of the “wear and tear” allowance. This allowance was available to landlords of fully furnished properties and was a tax reduction equal to 10% of the gross rent. From April 2016 this relief is being abolished and in future, relief will only be given for costs incurred in replacing furnishings. Full details of the changes have yet to be announced, but anyone thinking of replacing furniture in their rental property may wish to defer this until after April 2016.

Anyone who thins they might be affected by these changes should speak with an accountant or tax adviser.

Phil Jones