At the moment, landlords can claim tax relief on their mortgage interest payments. In other words, they can offset the cost of the mortgage interest from the rental income when they calculate their profits. But this situation won’t last for much longer. In his 2015 Summer Budget, George Osborne announced that landlords would no longer be able to deduct all their mortgage interest when they work out their profits. Instead, mortgage interest tax relief will gradually be cut back to 20% between 2017 and 2020.
Limited companies are not affected by the changes to mortgage interest tax relief. Many landlords are therefore setting up a company to minimise the impact of the new tax regime. However, it’s important to remember that HMRC will treat any transfer of ownership of a property as a sale, so there could be a capital gains tax bill to pay. The mortgage options might also be limited because lenders offer a restricted choice of home loans to companies.
The tax attack on landlords does not stop at mortgage interest. The chancellor also imposed tighter restrictions on the wear and tear allowance. From April 2016, landlords will no longer be able automatically to deduct 10% of their rental profits as notional wear and tear. They will be able to claim tax relief only on costs they have actually incurred, such as if they have bought a new sofa or bed for the property or paying for agents fees, etc.
Since September 2015, landlords in England must also fit smoke and carbon monoxide alarms or face a penalty of up to £5,000.