Is the Summer Budget Really That Bad for Landlords?


UK Chancellor George Osborne last week presented his Summer Budget, the first purely Conservative Budget since 1996.

What implications does it have for the UK property market? There are some bad news for landlords, which landlord associations were quick to highlight; but there are also some positives, especially for homeowners and flatshares.

The bad news for landlords

  1. Mortgage interest tax relief will no longer be applied depending on a landlord’s highest tax bracket. So far, a landlord paying the top tax rate of 45% above earnings of £150,000 p.a. will be receiving mortgage tax relief at that rate (45%) . From  April 2017, this relief will progressively start dropping towards  20%, over a period of four years. This measure intends to address what was seen as unfair by many – that landlords get a tax relief on their mortgage payments, but homeowners don’t.
  2. The second tax increase results from an end to the tax relief on dividends. Tax relief on dividends would encourage larger buy-to-let landlords to run their property portfolio through a business, and to disburse their earnings under the form of a relatively low salary (often below the minimum taxable threshold) plus dividends. Under the new rules, only the first £5,000 of dividend income will be tax free, with three bands applying beyond that, depending on the amount in dividends paid (the bands are 7.5%, 32.5% and 38.1%).
  3. The 10% allowance for wear and tear – from which landlords would benefit regardless of whether they replace the furnishings of  a property or not) will also be abolished from April 2016, with relief only to be claimed on the equipment and furnishings which are being replaced.

The good news for landlords

  1. Plans to encourage subletting will take a backseat after significant resistance from landlords. The measures proposed in the Spring budget proposed to make anti-subletting clauses in tenancy contracts illegal – however this caused an outcry from landlords and raised concerns over their ability to keep control of their relationship with their tenants.
  2. Good news for live-in landlords with lodgers as well – and for flatshares: with soaring rents, in London in particular, the tax free allowance for rental income from a lodger of previously  £4,250 has now been increased to £7,500 per year. This corresponds to more reasonable level of rent – hence, for instance, a live-in landlord with a lodger (or flatmate) paying £600 a month will no longer have to tax the rental revenue at all. This should encourage some to take on lodgers – and could help the housing market in areas where it is particularly tight. So, why not find a flatmate for your spare room?
  3. A bit more far-fetched, but it may still help landlords with larger property portfolios: the corporation tax will continue to decrease – George Osborne announced the corporation tax would fall from 20% to 19% in 2017, and to 18% in 2020. Whilst the end to tax relief on dividends is  a negative for landlords who run their buy-to-let portfolios through a company, the corporate tax cut should somewhat offset this.

The Budget’s negative impact on landlords and tenants may have been overstated

Overall, the Summer Budget is a modest negative for landlords. However, the most ardent critics may be overstating its impact.  Their argument? That the reduction in mortgage interest relief may be passed on to tenants in the form of higher rents. We believe those concerns look overdone.

First, most landlords buy for capital gains rather than just income.. Secondly, we would not underestimate the positive impact of the higher tax free allowance for lodger income, which could help supply. Lastly, our research shows that finding the right tenants (and hence having peace of mind) is the highest priority for 80% of landlords, and is more important than getting the highest possible rent.

Wonego builds trust between landlords, tenants and letting agents. Find your perfect tenant or flatmate with us.

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