Individuals that own and let property are facing a number of changes to the way in which their rental income, and more importantly, the deductions they can make from their rents for income tax purposes, are changing.
1. An increase in the rent-a-room allowance.
2. The abolition of the wear and tear allowance if you let furnished residential property that is not part of a holiday lets business; and the introduction of a new replacement furniture relief.
3. The gradual restriction of higher rate income tax relief for finance costs.
TAX INCREASE WARNING: The third item, the gradual restriction of higher rate tax relief on finance costs, is likely to be the most impactful of the changes for individuals who have built their property portfolios by borrowing significant amounts when adding properties to their letting business.
The restriction of income tax relief will apply to:
• Who let residential property in the UK or elsewhere, and
• Who are claiming a deduction for financing costs (see below for list of costs included) from April 2017, and
• Who pay income tax on their property income at the higher (40%) or additional (45%) rates.
The new measure will gradually restrict landlords’ tax relief, for finance costs to purchase residential properties, to the basic rate of income tax. From 6 April 2020 landlords affected will no longer be able to deduct their finance costs from their property income. Instead they will receive a basic rate deduction from their income tax liability.
Between now and the 6 April 2020 relief will be tapered as follows:
2017-18 The deduction of allowable finance costs will be restricted to 75%, with 25% being available as a basic rate income tax deduction.
2018-19 The deduction of allowable finance costs will be restricted to 50%, with 50% being available as a basic rate income tax deduction.
2019-20 The deduction of allowable finance costs will be restricted to 25%, with 75% being available as a basic rate income tax deduction.
A consequence of this change to a basic rate deduction is that the rental income for tax purposes increases with no increase in rents. In some circumstances this may mean that basic rate taxpayers become higher rate tax payers.
Finance costs include: mortgage interest, interest on loans to buy furnishings, and fees incurred when taking out or repaying mortgages or loans.
Landlords have until April 2017 to consider the effects of this measure on their property businesses
Please contact us if you would like to explore your planning options in more detail.