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I planned to fund my retirement with buy-to-let properties: does the Budget tax relief cut scupper this and what are the alternatives?



By Rachel Rickard Straus for  

I have buy-to-let properties that I was planning to use to fund my retirement. This seemed to me a good alternative to saving towards a traditional pension pot.

But I saw in the Chancellorís Budget that he is reducing the tax relief for loan interest on buy-to-lets.

Does this mean my retirement plan is no longer viable?

If so, what other alternatives are there to find a safe and productive home for my retirement savings? I donít really want to buy an annuity.

Profitable: The Chancellor has taken steps to cool the buy-to-let property market - so is it still a good option for a retirement income?

Profitable: The Chancellor has taken steps to cool the buy-to-let property market - so is it still a good option for a retirement income?

Rachel Rickard Straus of This is Money replies: Buy-to-let is proving an increasingly popular investment - particularly for a retirement income - and it's easy to see why.

Investors have always been drawn to the property market, which is not surprising given that the value of their own homes has soared by more than 210 per cent over two decades. 

Buy-to-let has particularly flourished as savings rates on the High Street have plummeted and payouts on pensions have fallen by a third and property values have risen. 

Since buy-to-let is treated as an investment, until now expenses could be claimed back - including mortgage interest payments. This perk is not available to owner-occupied homes.

Then on the flip side, as with other investments, capital gains tax would be payable when the property was sold - unlike in the case of owner-occupied homes. 

However as the Treasury and Bank of England have started to raise concerns about the popularity of buy-to-let, the Chancellor took measures in the Budget earlier this month to cool the market down. 
The amount of mortgage interest landlords can claim as relief will be set at the basic rate of tax Ė currently 20 per cent.

This change will be phased in over a four-year period from April 2017. Currently, landlords can claim tax relief on monthly interest repayments at the top level of tax they pay.

The profitability of buy-to-let depends on the margin between expenses paid out - including the mortgage interest - and the rental yields earned. For those who see the margin shrink, buy-to-let becomes a less attractive prospect.

So as the Treasury starts to reduce tax relief on mortgage interest for higher-rate taxpayers, buy-to-let is likely to become less profitable for some.

I asked an accountant whether buy-to-let is still viable as an income for your retirement. 

Lynne Rowland, tax partner with accountants Kingston Smith replies: Ever since Gordon Brown started the raid on UK pension funds by removing the ability to reclaim tax credits on dividends, pension tax relief has been gradually eroded.

Final salary pension funds are today a rare commodity and introduction of lifetime and annual allowances has resulted in many people reaching the upper maximum on their potential pension investment and seeking alternatives.

Bricks and mortar in the form of residential property for letting purposes has proved extremely popular and can provide a decent income supplement for property owners.

The ability to set any loan interest on a mortgage used to acquire the property as an expense against the income earned, has made the income generated doubly attractive as it effectively provides a measure of tax relief not enjoyed if you have a mortgage on your family home.


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