Are you a buy-to-let investor? Changes are imminent

The latest in our series of articles about the summer budget covers the government’s changes affecting landlords.

In his budget, George Osborne voiced concern about the potential risks posed to the UK’s financial stability by the rapid growth in buy-to-let mortgages.

Many investors may have been drawn to this market as an alternative to more conventional investment methods despite the potential pitfalls. The demand for rental property has skyrocketed, fuelled by potentially higher yields, the possibility of capital growth due to increasing property values, low interest rates and substantial tax breaks. When these factors are all taken into account the possible impacts of Income Tax, Capital Gains Tax and even Inheritance Tax have made buy-to-let arrangements worth the risk, but the government has hatched plans to restrict the tax reliefs available to landlords and these will be phased in over four years beginning in April 2017.

When calculating rental profits mortgage interest payments on buy-to-let properties are currently deductible, and as profits are taxed at the individual’s marginal rate, these interest payments could receive tax relief up to 45%. The revised rules will mean that by April 2020 the tax relief on mortgage interest payments will be limited to the basic rate (20%).

In addition to the tax relief changes, the wear and tear allowance for maintenance on buy-to-let properties will be removed from April 2016 and replaced with allowable deductions for actual expenditure.

In a surprise move, the rent-a-room relief, which has remained unchanged for nearly 20 years, has been increased, so from April next year if you’re renting out a room the tax free income limit will increase to £7,500.

It is too soon to see what the impact will be on buy-to-let mortgage rates, but if you’re considering entering this market it makes sense to seek professional mortgage advice at an early stage, preferably from an adviser who has the ability to search the whole of the market on your behalf.

It is worth remembering that investing in property can be inherently risky as cash is quite literally tied up in bricks and mortar and if market conditions aren’t favourable liquidity can be a big problem. For buy-to-let landlords an empty property can prove costly too, so care is required before taking the plunge in this sector. If you’re considering such a move speak to one of our Financial Planning Consultants for impartial, independent advice.

It is also prudent to seek professional advice about the potential impacts of Income Tax, Capital Gains Tax and Inheritance Tax on property ownership. You can read Armstrong Watson’s latest update on the budget announcement here.

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