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#SummerBudget Chancellor hits buy-to-let property investors

THE CHANCELOR’S Budget is likely to have a significant impact on the buy-to-let market.

Wealthier landlords that currently receive a hefty 40% or 45% tax relief on their mortgage interest will be dramatically hit by a new phased restriction to the basic rate of 20% from 2020.

From next April, the government will now reform the 10% wear and tear allowance, which means that all landlords will only be able to deduct the costs that they actually incur. Currently, the allowance can be applied whether or not landlords replace furnishings in their property.

Such a move is likely to make a big difference to the treasury coffers by significantly increasing the tax take from furnished properties and effectively removing the tax advantage of such properties.

Charles Beer, managing director of Alvarez Marsal and a leading real estate tax specialist, said: “This is quite a significant hit to the larger buy-to-let landlords. Over time it will shift the balance towards bigger, professional landlord funds who want be exposed to these restrictions because they will be institutional.This will accelerate that trend. It probably won’t change a lot for the amateur investor, but it may encourage the bigger landlords to incorporate.”

Meanwhile, the government’s new plans to reduce rents paid by tenants in social housing in England by one per cent a year for four years from 2016, will have a big impact on housing associations.

The only real winners look to be owner-occupiers renting out a spare room, after Osborne outlined how the rent-a-room scheme will increase from £4,250 to £7,500 a year from April 2016.

Bhimal Hira of Jeffreys Henry accountants said that having spoken to a number of landlord clients, they said they would look to increase rent to cover the difference and maintain rental yield. Others are now looking at the advantages of  corporate structures, trusts and limited companies to hold buy-to-let properties.

Other Budget-related property ramifications include family homes worth up to £1m being passed onto a child or grandchild will now be taken out of the deeply unpopular IHT trap.

 

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