In the Budget, the Chancellor announced plans to restrict tax relief on finance costs for individual buy-to-let landlords of residential property to the basic rate of tax from the current allowance set at the 40% rate.
The restriction will be phased in over four years, starting from April 2017 to give landlords time to plan for the change.
This is designed to limit the advantage that these individuals currently enjoy over those purchasing their own home. At the moment, buy-to-let landlords own 15% of residential property.
Since the announcement, a petition has been raised to reverse the planned tax relief restriction on ‘individual’ landlords with over 20,000 signatures at present.
This is how the Government have responded to the petition;
The Government is committed to a fair tax system so is restricting relief on landlord property finance costs to the basic rate of tax, reducing the generosity for wealthier landlords.
The Government is committed to a fair tax system so is restricting tax relief landlords can claim on property finance costs to the basic rate of income tax.
Landlords are currently able to offset their mortgage interest and other finance costs against their property income, reducing their tax liability. This relief is not available for ordinary homebuyers and not available to those investing in other assets such as shares. Currently the landlords with the largest incomes benefit the most, receiving relief at their marginal tax rates of 40% or 45%.
By restricting finance cost relief available to the basic rate of income tax (20%) all finance costs incurred by individual landlords will be treated the same by the tax system. This recognises the benefits to the economy that investment in property can bring but ensures the landlords with the largest incomes will no longer benefit from higher rates of tax relief.
By unifying the treatment of finance costs for all individual landlords, the Government is reducing the distortion between property investment and investment in other assets, and reducing the advantage landlords may have in the property market over ordinary homebuyers.
Less than 1 in 5 (18%) of individual landlords are expected to pay more tax as a result of this measure. Taking account of the other measures from the Summer Budget, the Office of Budget Responsibility (OBR) have not adjusted their forecast for house prices. The OBR expect the impact on the housing market will be small. Furthermore, this change is being introduced gradually from April 2017 over 4 years. This will give landlords time to plan for and adjust to these changes.
HM Treasury
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