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Property tax relief: winners and losers

The Government has announced a number of changes to property tax reliefs, which are set to come into force over the coming years. Here we provide a round-up of some of the key reforms.

Wear and tear allowance
For furnished residential lettings an allowance is currently available to cover wear and tear on certain items (such as suites, beds, carpets, curtains, linen, crockery, cutlery, cookers, washing machines and dishwashers). For such items it is possible to claim an annual wear and tear allowance equal to 10% of the rents received (less certain expenses). However, subject to consultation, from April 2016 the wear and tear allowance will be replaced with a new relief that allows all residential landlords to deduct the actual costs of replacing their property furnishings.

HM Revenue & Customs (HMRC) has also proposed extending the tax break to properties regardless of whether they are partly furnished or unfurnished. This means that a broader number of claimants will benefit, as well as ensuring a more consistent way of calculating profits.

The new furniture replacement relief does not apply to furnished holiday lettings or letting of commercial properties, because those businesses receive relief through capital allowances. However, owners of all other residential properties can claim a deduction for the replacement cost of furniture, furnishings, appliances and kitchenware.

Rent-a-room relief
Owner occupiers and tenants who let furnished rooms in their only or main residence may claim rent-a-room relief. Under the rent-a-room scheme, income from letting furnished rooms in your main residence will be exempt from tax if the gross annual rent does not exceed £4,250 (£2,125 if you share the income) in 2015/16. However, from April 2016 the level of rent-a-room relief will be increased to £7,500 per year.

If you are letting to lodgers who live as part of the family, there will be no loss of the capital gains exemption. Otherwise, there may be some restriction.

The move is expected to benefit those who rent rooms to long-term lodgers, and also short term stays. Users of online room letting platforms, such as Airbnb, will qualify for the relief.

Landlord tax reliefs
In a move which Chancellor George Osborne promised would ‘level the playing field’, landlord tax reliefs will see a phased change over four years from April 2017. Currently, buy-to-let landlords are able to claim tax relief on monthly interest payments at their top level of tax – up to 45% – and this is to be eventually reduced to the current basic tax rate of 20%.

The impact on individuals will depend greatly on their specific circumstances. Contact us for help with planning ahead.