Summer Budget 2015 contained one or two unpleasant surprises, especially if you are a landlord and liable to higher rate tax.
Chancellor George Osborne announced that the Government will restrict the amount that residential landlords can currently claim on loan interest payments from April 2017. According to the Chancellor, this will “create a more level playing field between those buying a home to let and those buying a home to live in”.
Changes to the deductibility of interest
Currently, landlords who buy a property for the purposes of letting it out can deduct certain expenses from any rental income they receive. One of the most prominent expenses, if not the largest single expense, tends to be the interest on the loan (this is not to be confused with any repayment of capital, which is not an allowable deduction).
Under the new rules, which will be phased in over a four-year period from April 2017, the amount of interest that landlords can claim tax relief on will be restricted to the basic rate of tax, which is currently 20%.
Compare this to the current rules, where landlords are able to claim tax relief on their loan interest payments at their marginal rate of tax, which is effectively the rate of tax they pay. This means that if you are a higher rate taxpayer, you can receive 40% tax relief on any mortgage interest being paid.
A rental business that has a low level of interest in relation to the borrowings may not be significantly affected by the new rules. However, any landlords with a number of “buy to let” properties who have previously re-mortgaged to utilise equity and thereby free up capital to expand their property portfolio, will face an unwelcome surprise.
Changes to relief for expenditure on furnishings
Another announcement in the Summer Budget was the abolition of the ‘wear and tear’ allowance from April 2016. Currently landlords of fully furnished rental properties are able to claim a flat rate deduction of broadly 10% of rental income, to take account of the normal wear and ageing of furnishings.
The new rules will introduce a ‘replacement furniture relief’ which will ensure that any landlord can claim a deduction for the replacement of furnishings. What this means in practice is that the costs of initially furnishing a rental property will be disallowable, but relief will be available once replacement items are required to be purchased. This is similar to the ‘renewals basis’ which was only recently abolished.
The good news is that it is likely the new relief will be available to landlords of partially furnished propertieswho, up until now will not have had any relief for furnishings available to them. It would therefore seem that this relief makes the system fairer for all landlords.
Landlords of furnished holiday lettings will be unaffected by the new rules, since capital allowances remain available on capital expenditure incurred.
Rent-a-room relief
Many people take in a lodger to their family home to help pay the bills. This income is taxable in the hands of the homeowner to the extent it exceeds £4,250. After several years of a static exemption, the government has finally announced that the allowance will be increased, which is a welcome change.
From April 2016 the relief will be increased to £7,500 per annum. This means that families will be able to receive tax free income of up to £625 per month for renting out a room in their home. The new level will take many families out of tax altogether on income from lodgers.
For help with any aspects of tax please contact our specialist tax team on 0845 177 5500 or contact us on-line.