Proposed Changes to the Rental Sector

From April 2016 landlords of furnished properties will be unable to claim the 10% Wear and Tear allowance in arriving at their total taxable rental profits. Currently, the wear and tear allowance can be claimed whether furnishings were actually replaced in the tax year or not.  A new relief is to be introduced which only allows for tax relief to be given against the actual costs incurred.

The Chancellor, it seems, is seeking to close the gap between landlords and other homeowners. Landlords are currently able to deduct their finance costs when calculating their rental profits, with wealthier landlords receiving 40% and 45% tax relief for their rental finance costs. Conversely, homeowners are unable to claim any relief for the mortgage interest they pay. 

In order to address this the Government has announced plans to restrict the tax relief available on finance costs to the basic rate of income tax over the next 4 years (see table).  Finance costs include any mortgage interest payments and fees incurred in obtaining a mortgage or loan.

The tax relief available for finance costs will be restricted and phased in over the next 4 years.

Landlords will be able to obtain relief as follows:

  • In 2017-18 the deduction from property income will be restricted to 75% of finance costs, with remaining 25% available as a basic rate tax reduction;
  • In 2018-19, 50% finance costs deduction and 50% given as a basic rate tax reduction;
  • In 2019-20, 25% finance costs deduction and 75% given as a basic rate tax reduction;
  • From 2020-21, all financing costs incurred by a landlord will be given as a basic rate tax reduction.

Source: https://www.accountancylive.com/summer-budget-2015

 

The current proposals only apply to residential property lettings. The restrictions will not be applied to limited companies. As such higher rate taxpayers who wish to buy a rental property may wish to consider whether it is more beneficial for them to own the property personally or through a limited company.

It is worth noting that the Government is undergoing a consultation process before any changes will be implemented.  We will of-course keep you updated of any future changes.

Finally, on the 25th November the Chancellor announced a major hike in the amount of Stamp Duty payable by Buy-to let landlords and those who are buying a second home. A 3% surcharge will be charged on top of the current rate payable on each stamp duty band. These changes will be introduced on 1 April 2016.

Purchasers will have 36 months to claim a refund of the 3% surcharge if a new main residence is purchased before the sale of their previous one.

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