All higher-rate taxpayers who own buy to let properties on which there is a large mortgage will pay substantially more tax. Some current basic-rate taxpayers will also be hit, because the change will push them into the higher-rate tax bracket. The impact of the tax change is reduced for those with a small mortgage or who have borrowed at a low interest rate.
The mechanism of Mr Osborne’s tax attack is the removal of landlords’ ability to deduct the cost of their mortgage interest from their rental income when they calculate a profit on which to pay tax. What is also becoming clear is that worst hit will be those modest, middle-class savers who have prudently chosen to invest in buy to let, often alongside pensions and Isas, as a means to supplement their income. So very wealthy landlords who do not need mortgages are untouched.
Here is a worked example assuming you, the landlord, pay 40pc tax.
Your buy-to-let earns £20,000 a year and the interest-only mortgage costs £13,000 a year. Tax is due on the difference or profit. So you pay tax on £7,000, meaning £2,800 for HMRC and £4,200 for you.
Tax is now due on your full rental income of £20,000, less a tax credit equivalent to basic-rate tax on the interest. So you pay 40pc tax on £20,000 (ie £8,000), less the 20pc credit (20pc of £13,000 = £2,600), meaning £5,400 for HMRC and £1,600 for you. Your tax bill has therefore gone up by 93pc.
n my humble opinion, this can only mean that one of two things will happen, both leading to the same consequences.
Firstly, landlords will have to increase the rent they charge to make their investment viable. This will severely limit tenants’ capacity to rent and, as many can’t buy due to an inability to save a deposit and/or borrow due to current lending constraints, they will have difficulty in finding anywhere affordable to live.
The second consequence will be that many buy to let investors will have to sell as their investment will become uneconomic. This will mean that there will be fewer properties available to let, again leading to rent increases for the buy to let properties which remain on the market.
There will be a short term advantage though; as there will be more properties available for sale for a limited period, the property price increases will be subdued until the influx of buy to let properties available for sale works its way through the system. Only then will the impact of this government policy become apparent to those unable to buy and who need to rent.
A rethink is necessary!