The Chancellor announced in his Summer Budget, there would be restrictions on the amount of tax relief that landlords could claim. Alongside this, he announced that there would be changes to the tax treatment of maintenance costs for furnished properties.
Osborne explained that the current tax system favours landlords over home-owners, as they are able to offset their mortgage interest payments against their income, and the better off they are, the more they can offset. Considerate of this, the proposals aim to address the imbalance between buy-to-let investors and residential owners.
The restriction will prevent landlords from deducting loan interest from their rental profits, and will limit the advantage over those who purchased their own homes. Currently, 15% of residential properties have buy-to-let landlords.
The changes will be phased in over four years, starting in April 2017, so this gives landlords some time to plan.
2017-18 – The tax deduction from property income will be restricted to 75% of finance costs with the remaining 25% being available as a basic rate tax reduction
2018-19 – 50% finance costs deduction and 50% as basic rate tax reduction
2019-20 – 25% finance costs deduction and 75% as basic rate tax reduction
2020-21 – 100% basic rate tax reduction
How will I be affected?
If you are: –
• in receipt of buy to let rental income and
• you are a higher rate tax payer and
• you used a loan to acquire the property on which you are paying interest
Then you will lose higher rate tax relief on the loan interest. This will mean a number of landlords who previously paid at basic rate will be liable at higher rates from April 2017.
For example:
A couple have a buy-to-let business with no other income and they receive rental income of £600,000 and incur repairs and other allowable expenses of £200,000 and pay loan interest of £350,000.
|
|
Current Basis Ends 2015/16 |
New Basis Starts 2016/17 (below is after 2020/21 |
|
Rent |
£600,000 |
£600,000 |
|
Costs |
£200,000 |
£200,000 |
|
Interest |
£350,000 |
0 |
|
Profit |
£50,000 |
£400,000 |
|
Personal Allowance – Husband and Wife |
£22,000 |
0 – income over £122,000 |
|
Tax |
£5,600 |
£147,800 |
|
Interest Credit – 20% x £350,000 |
N/A |
£70,000 |
|
Tax Liability |
£5,600 |
£77,800 |
|
Tax Rate |
11.2% |
114.4% |
The new system will see them taxed on profits of £400,000. They are now additional rate tax payers (45%). When the profit is shared by the couple, they receive £200,000 each and lose their personal allowance as their income exceeds £122,000.
What if I sell my rental property?
Some landlords are expected to sell their properties before these changes are implemented and they need to consider the potential cost of Capital Gains Tax. If your property has increased in value during your period of ownership you may be liable to pay Capital Gains tax on this increase. There is an annual tax-free allowance which for 2015/16 is £11,000. If you sell your property, you will need to declare this on your tax return.
Changes to ‘Wear and Tear’ Allowance
Currently landlords of furnished lettings are able to deduct 10% of rents (net of expenses usually paid by the tenant e.g. Council Tax, electricity).
In the summer budget it was announced there would be a consultation with a view to removing this relief and replacing it with a relief that enables all landlords of residential dwelling houses to deduct the costs they actually incur on replacing furnishings in the property. This will give relief for capital expenditure to a wider range of property businesses as well as a more consistent and fairer way of calculating taxable profits. It is likely the results of the consultation will be announced in the Autumn Statement.
We can guide you through the complexities and ensure you have all the necessary documentation prepared. Plus accountant fees are tax-deductible, so you don’t need to worry about that!