TFC Homeloans' Managing Director, Nigel Payne, Reveals His Thoughts

Posted by Marketing on July 21, 2015

The Facts

At TFC Homeloans we have had a number of clients and brokers asking questions about the impact of the budget changes for buy to let properties. Here is a short guide with some working examples.

In his summer budget the Chancellor of the Exchequer, George Osborne said that the higher rate of mortgage interest relief would be withdrawn over a four year period from April 2017 for buy to let properties owned by an individual.

Mortgage interest relief will still be available for landlords but it will be restricted to the basic rate of income tax (currently 20%). The proposed measures will not fully impact the market until 2020/21 as during the preceding three years there is a tapered reduction in mortgage interest relief.

The tapering starts in 2017/18 with one quarter of interest being restricted to basic rate tax, rising to one half in 2018/19 and three quarters in 2019/20. The proposed changes do not affect BTL properties owned by a limited company.

So in the short term for the next 20 months nothing changes, apart from a separate measure he announced to withdraw the 10% ‘wear and tear’ tax allowance for furnished lettings with effect from April 2016.

As most BTL investors see their investment as a long term one, even though in the short term nothing changes, prospective purchasers of a BTL property and existing landlords need to consider the medium and long term impact of these changes on their investment.

Some commentators are simply saying any loss of benefit to the landlord will result in higher rental prices but this will be driven by market forces and cannot be guaranteed to happen, so let’s stick to the facts of what the changes to mortgage interest relief will mean to BTL landlords.

Potential Scenarios

Download two working tax examples both above and below the higher rate tax threshold which can be shown to your clients to help to illustrate these adjustments. 

Download Examples

Next Steps

Landlords who are likely to come under the second scenario have 20 months to consider what to do.

The landlords may do nothing and pay additional tax and either accept a lower return on their BTL investment or hope for a rental increase to offset the extra tax costs.

A landlord may transfer the property into a limited company, however this is likely to involve paying Stamp Duty and potentially capital gains tax, as well as arranging a new mortgage for their property. New landlords who are looking at their first BTL purchase can take the limited company route without these issues.

A landlord can simply decide to exit the BTL market and sell their property.

Only the client can decide but he may seek some advice and understanding from his broker and I hope the above helps to provide some clarity on the issue.