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Relief reduction hits sector

Rents may rise as landlords face tax hit

rent property to letMany of Scotland’s landlords in the private letting sector will need to raise rents to cope with the effects of a new taxation regime.

The warning comes from property managers, DJ Alexander, following analysis of the abolition of 100 per cent tax relief on buy to let mortgages.

Relief is falling from 100% to 75% and being eliminated altogether by 2020/21, when it will be replaced by a basic 20% tax relief on finance costs for all borrowers.

The annual 10% allowance for ‘wear and tear’ was axed at the end of the 2015/16 financial year.

Rob Trotter, associate director at DJ Alexander, said: “Only when we got down to the nitty gritty of the legislation did we realise the full scale of the effects on incomes, with some landlords seeing their income tax bills go up by more than one-third.”

Accountancy firm Johnston Smillie said that a landlord in Edinburgh or Glasgow, who is also in regular employment, could see his or her effective tax rate rise from 40% to 56% by 2020/21.

The figures relate to a flat costing £250,000 and producing rental income of £13,200 per annum (£1,100 a month).

This assumes the property is subject to a loan of 80% of the purchase price (at 2.5%) and the landlord has other taxable income of £50,000 per annum.

Mr Trotter said: “While the new regime will not affect cash buyers or company owners, in Scotland around 85% of privately-rented stock is in the hands of private landlords and the vast majority of these have substantial borrowings.

“Landlords are likely to be able to compensate for their extra tax bills by increasing rents but I am concerned at the consequences for tenants as rents are already rising higher than the rate of inflation.

“My hope is that rent increases will be manageable as it is not in the interests of landlords for tenants to be priced out of the rental market.”

 

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