A survey carried out by the Residential Landlords Association found that 60% of landlords surveyed would be pushed into higher rate tax by the interest changes announced in the summer budget.
- Mortgage interest deductions restricted to basic rate relief (20%)
- Additional 3% stamp duty tax on second homes
- Wear and tear allowance abolished
- Rent a room relief increased
- New £1,000 digital tax free allowance for internet property rentals
Currently landlords can offset finance costs incurred (usually mortgage interest payments) against rental income when calculating their taxable profit. This longstanding relief has offered many landlords significant tax savings over the years.
From 6 April 2017 the government is phasing out this relief so that by 2020/21 instead of being able to deduct interest, an individual will only be allowed an income tax deduction at the basic rate (20%) on interest paid.
During the transitional years landlords will be able to claim:
- 2017/18 – 75% of the interest against rental income & 25% basic rate tax relief
- 2018/19 – 50% of the interest against rental income & 50% basic rate tax relief
- 2019/20 - 25% of the interest against rental income & 75% basic rate tax relief
The basic rate tax relief will be applied after the personal allowance has been deducted and therefore may result in an individual’s personal allowance being restricted if income exceeds £100k.
These rules will mainly affect those with large mortgages and higher / additional rate tax payers. Please note this rule does not apply to rental properties owned by a company or furnished holiday lets.
Assumes a higher rate (40%) tax payer, who’s personal allowance and basic rate band is fully used against their salary. The individual’s rental income is therefore taxed at 40%. The individual has rental income of £20k and mortgage interest of £10k.
|Current rules||New basic rate relief rules|
|Tax at 40%||4,000||8,000|
|Less basic rate relief (£10k @ 20%)||(2,000)|
|Tax payable on rental income||4,000||6,000|
From 6 April 2016 there will be an additional 3% stamp duty tax on second homes costing over £40,000 (including buy-to-let properties). If you are selling your main residence but it is not sold by the date you have bought your new home, the higher rate of stamp duty will be payable but will be refunded if your previous main residence is sold within 36 months.
Wear and tear allowance
From 6 April 2016 the current ‘wear and tear allowance’ available on furnished lettings will be abolished. Historically landlords have been able to deduct a fixed annual deduction for the wear of furnishings at 10% of rents less amounts usually paid by the tenant.
This was a generous relief providing deductions regardless of whether the landlord had any expenses.
From 6 April 2016 landlords will only be able to deduct expenses actually incurred on replacing furnishings (excluding any elements of improvement).
If it is possible you should try to defer expenditure on replacement furnishing until after 6 April in order to make the most of both reliefs.
It is therefore key to keep all receipts and records of expenditure to ensure you are limiting your tax bill.
Rent a room relief
The tax free income amount when a lodger rents a room in the owner’s house has increased from £4,250 to £7,500 from 6 April 2016.
Digital tax free allowance
From April 2017 a new £1,000 ‘digital’ tax free allowance will be introduced to individuals who sell services or rent property online. If you would like to discuss how any of the above changes may affect you, please do not hesitate to contact us.