HM Revenue & Customs promises the change to the way tax relief is collected from landlords will be gradually introduced over a period of four years to be fully phased in by April 6 2020.
On its website, HMRC states: “Finance costs won’t be taken into account to work out taxable property profits. Instead, once the income tax on property profits and any other income sources has been assessed, your income tax liability will be reduced by a basic rate ‘tax reduction’. For most landlords, this’ll be the basic rate value of the finance costs.”
Dampening demand
Robert Sinclair, chief executive at the Association of Mortgage Intermediaries, acknowledges: “The pending changes to add gross rental income to gross earned income, then only allow costs at the basic rate of tax will begin to bite over the next few years.”
John Phillips, group operations director for Spicer Haart and Just Mortgages, agrees the former chancellor’s move to take away the 40 per cent tax relief for higher rate tax payers, along with the additional stamp duty for second properties are the biggest tax changes for the buy-to-let sector.
But he asserts that while the former is yet to come into effect, “it is already having a huge effect in dampening demand for the buy-to-let market”.
Mr Smith-Thompson also believes the bigger of the two tax changes will play out this year.
He warns that without being able to claim back mortgage interest, “this means that investors could end up paying more tax than the profit they receive”.
Changes to the way those with buy-to-let properties are taxed are not the only challenges facing the market at the moment.
Those with buy-to-let portfolios also face increasingly tougher rules from regulatory bodies the FCA and PRA.
Jane Benjamin, head of relationship management at Sesame Bankhall Group explains: “The UK’s buy-to-let mortgage industry is now on watch as the Bank of England’s Financial Policy Committee (FPC) will be granted new powers by the government to help it protect the financial system from future risks in the buy-to-let mortgage market.
“From early 2017 the FPC will be able to direct the PRA and FCA to require regulated lenders to place limits on buy-to-let mortgage lending in relation to loan-to-value ratios and interest coverage ratios.”
She continues: “This follows the FPC’s recommendation in 2014 that it be given additional powers of direction over both the residential mortgage lending market and the buy-to-let mortgage market."
