Benham & Reeves Residential Lettings urges calm in wake of recent tax changes

In the most recent Budget Announcement, George Osborne cut landlords’ tax relief for those paying higher rates of income tax. Currently, landlords can offset the interest on their mortgage repayments against the income they incur on the rent payments. Landlords can deduct their costs including mortgage interest payments from their profits before paying tax. Higher rate tax payers receive relief at 40 or 45%. However, from April 2017, this tax relief will be slowly phased out, restricting it by 2020 to 20% for all landlords regardless of earnings. While the changes have caused a lot of concern for landlords, Benham & Reeves Residential Lettings is urging landlords not to panic as the tax changes will have minimal consequences for many investors.

The tax changes are intended to cool the buy-to-let market which the Bank of England warned was in danger of overheating. Buy-to-let mortgages now account for 15% of all new mortgages in the UK, and there is growing concern that Britain’s appetite for buy-to-let is hampering first time buyers’ efforts to get on the property ladder.

Vidhur Mehra, Finance Director of Benham & Reeves Residential Lettings comments, “While there have been some worrying headlines in the wake of these announcements, the consequences will not be as far reaching as many fear. For overseas landlords who have a long history of investing in London, their UK earnings are at the basic rate of income tax so the recent announcements will have little impact on them. Even for UK based investors, it means they will only have a slightly higher tax bill as they will still be able to claim 20% rather than the existing 40 or 45%. As many of our clients are professional landlords, most will simply use the rent to service the mortgage and see their profit as the capital appreciation of the property. With rents increasing in London as housing supply constricts, property values are predicted to increase further over the medium to long term which should cushion many landlords. We’ve certainly not had any indication that our landlords wish to exit the rental market because of the planned tax changes.”

By definition, the investment would only be subject to tax of any kind if it was a profitable one. Some landlords may not be able to claim as much tax back on the profits but the tax changes are not likely to send most investors into the red. The UK’s tax laws and a rising property market will ensure the buy-to-let market continues to thrive and these changes are intended to ensure that property values continue to climb steadily rather than be subject to boom and bust cycles.