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Commercial Finance

Getting to grips with the mortgage tax relief changes

Changes to mortgage tax relief came into force on 6 April, meaning buy-to-let investors can no longer offset all their finance costs – such as mortgage interest, interest on loans to buy furnishings, and fees incurred when taking out or repaying mortgages or loans against their profits.

Under the new law, landlords can only offset 75 per cent of these costs against profits – reduced from 100 per cent previously - and this will be cut by a further 25 per cent each year, until it reaches zero in 2020. After that, all financing costs incurred by a landlord will be given as a basic rate tax reduction.

Fortunately, landlords have had adequate notice of this, since the tax changes were detailed in George Osborne’s budget in 2015, and the four-year phasing in process will help investors adapt.

Higher rate taxpayers will bear the brunt of the impact, although a significant number of landlords could move into that higher rate tax bracket over the next four years if their rental income increases, given the current strong rental market.

However, buy-to-let investors aren’t showing signs of being easily deterred and many have taken steps to weather the changes, including forming limited companies and switching to commercial and semi-commercial property investment, instead of residential.

Others are adapting their property portfolios in order to maintain profitability. For example, some are selling up London properties where tax-applicable profits tend to be higher, and investing in more cost-effective buy-to-lets in regions with better rental yields.

Many are using larger deposits and focusing on lower loan-to-values, and very much taking a long-term view. After all, with historically low interest rates, a broad offering of buy-to-let mortgages, a shortage of housing in the UK and a growing rental market, property is still seen by many as an attractive investment option.

Ultimately, only time will tell how the changes will affect the sector, but it has proved resilient to previous changes, such as the three per cent stamp duty hike last year, which should instil confidence.

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