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Changes for landlords of residential property

Interest relief on mortgages for buy to let properties
Over three years from April 2017 the way landlords receive tax relief on their mortgage or loan interest will change.

Landlords will no longer be able to deduct their mortgage interest relief from rental income before calculating their tax liability.  Instead they will get a tax credit equivalent to 20% basic rate tax on the interest amount.

From April 2017 only 75% of any interest will receive relief at the tax-payers marginal rate whereas 25% will receive relief at the basic rate of tax of 20%.  This is to rise to 50% and 50% from April 2018, 75% and 25% from 2019 and from April 2020 all interest will only receive tax relief at 20%.

Example
An individual has rental income of £10,000 after deducting tax relief for interest of £10,000 and other income of £45,000.

At present their total income potentially subject to income tax is £55,000, ignoring the personal allowance, giving a total tax liability on the rental income of £10,000 at 40% so £4,000.

By April 2020 they will pay 40% tax on £20,000 of rental income so £8,000 then enjoy a tax credit of £2,000 for their interest giving a net tax liability of £6,000.  An increase of £2,000 per year.

In addition to this if they receive child benefit they will have to pay an additional charge on this as their income subject to tax has increased from £55,000 to £65,000.  A similar additional tax will be suffered by those losing the personal allowance where the interest relief once took their income to below £100,000 and no longer does.

The restriction not only applies to the loans taken out to buy the residential property in theory it also applies to a loan taken out to acquire a motor vehicle to use in the management of a buy to let property or office accommodation from which the property business is run.

One way around this could be to incorporate but it depends on individual circumstances.  There are various reasons why putting properties into a company hasn’t been the most attractive tax option in the past and the new dividend tax rules from April 2017 are not going to help, neither is it likely to be an option for those with existing properties already held at a gain.  It could be the answer in some cases, for example where the higher rate tax payer doesn’t want to draw any of the profits because they want to reinvest.  It will also be subject to the banks agreeing to lend to the company.

Wear and tear allowance
Until 5 April 2016, landlords providing furnished accommodation are able to claim tax relief by way of a ‘wear and tear’ allowance. This is a flat-rate tax deduction equivalent to 10% of the ‘relevant rental amount’. The relevant rental amount is the gross receipts from furnished residential letting less any expenses borne by the landlord that would normally be borne by the tenant, for example utility bills.

This allowance is meant to cover costs relating to items such as movable furniture or furnishings, beds or suites, televisions, fridges and freezers, carpets and floor-coverings, curtains, linen and crockery or cutlery.

With effect from 5 April 2016, the wear and tear allowance will no longer be available and landlords will be able to claim relief on a replacement basis. This relief will cover the same types of expenditure as was relieved by the wear and tear allowance.

Under the replacement relief no relief will be given for the initial expenditure, only for the actual cost of replacing such assets.

If landlords are considering replacing such items they should now wait until after 5 April.

Neither the wear and tear allowance nor the replacement allowance give relief for expenditure incurred on fixtures integral to the building such as sanitary wear, immersion heaters, etc. The replacement of such items would continue to be a deductible expense as a repair to the property.

Landlords providing furnished holiday accommodation will not be affected by these changes and they will continue to receive relief under the capital allowance regime.

Stamp duty
From April 2016 anyone buying a second home or buy-to-let property will pay a 3% surcharge on their stamp duty bill.

Property value  Standard progressive rate  Buy to let/second home rate  
Up to £125,000  0% 3%
£125,000 to £250,000  2% 5%
£250,000 to £925,000  5% 8%
£925,000 to £1.5m  10% 13%
Over £1.5m  12% 15%

Rent and room relief
From 6 April 2016 the annual amount which landlords can receive for letting a room in their own home will increase from £4,250 to £7,500.

CGT
From April 2018 landlords will have to pay their CGT bill within 30 days of selling the property.

If you have any queries concerning any of these changes please do not hesitate to contact us.