How will the budget affect you?
To summarise, profit from rental income will now only be taxed at the basic rate of 20%, so the ability to off-set the interest element of a buy-to-let mortgage against tax will no longer exist. Furthermore, Landlords with furnished properties will no longer benefit from the wear and tear allowance of 10%. In its place Landlords will only be able to off set actual expenditure during a tax year.
Thankfully, the basic rate of tax will be implemented in stages over almost 6 years, so there is time to prepare for those tax changes. It is crucial that landlords take early independent tax advice on how the budget proposals will affect them, in order to implement a plan in a timely manner for when it does come into full force in 2020-21.
However, the wear and tear allowance will be taken away for the next financial year, so for those with furnished properties, it would make sense to hold off purchasing any furniture until after 6th April 2016. Alternatively, by letting a property unfurnished you could benefit from the council tax exemption (in a void period) instead ... before they take that away too!*
Overall though, it is another blow to the BTL investor market. It is disappointing that on one hand the government are keen to get Landlords to invest more into their properties, invest in more properties to let to keep rents down, but then they take away the available cash flow to do this.
More than half of the under 40s will be renting homes from private landlords in the UK in 10 years' time, accountancy firm PwC has predicted, (House prices: Renting to overtake home ownership among young, says PwC) so it will be interesting to see how much of an effect, negative or otherwise, these changes will have to the supply of quality stock to the PRS over the next few years.
We believe the Buy to Let industry is a business, Landlords are business owners even the 'accidental Landlord') and BTL mortgages should essentially be classed as business loans, (as residential mortgages get a much more favourable rate of interest) which should have tax relief on them.
With yields (on decent properties that tenants what to rent) struggling to achieve over 6% in Swansea, we fear there is the threat that this will either forcefully drive rents up or deter Landlords from investing in their properties (being able to carry out timely repairs), or both.
Read some more articles online here:
http://www.propertyindustryeye.com/landlords-tax-perk-to-be-reined-back-over-next-six-years/
*Swansea council still offer 6 months exemption of council tax for unfurnished properties per year. Each council have their own rules on this, so if you have property outside of Swansea you may not have any or limited exemption rights.