Insights

The first of a series of Summer Budget 2015 Tax Change Updates, this blog outlines the three ways landlords with residential property are affected. Some of the changes will mean landlords have increased tax liabilities, but other changes are less punitive.

Restriction to tax relief on finance costs

Perhaps the change with potentially the biggest long term impact is the restriction imposed on tax relief on finance costs available for landlords. It will gradually reduce the level of tax relief available from the higher rate of tax as now, down to the basic rate of tax. Clearly it is a policy introduced to dampen the buy-to-let market in favour of first time buyers.

The key points are:

• This change is being phased in over 4 years from April 2017;
• The amount of income tax relief individuals are able to receive on finance costs relating to buy to let residential property will be restricted to the basic rate of tax;
• Introduced over a 4 year period, the impact will be as follows:
  • 2017/18 - 75% of interest paid will receive higher rate relief, 25% will receive basic rate relief;
  • 2018/19 – 50% of interest paid will receive higher rate relief, 50% will receive basic rate relief;
  • 2019/20 – 25% of interest paid will receive higher rate relief, 75% will receive basic rate relief;
  • 2020/21 onwards – all interest will receive only basic rate tax relief.

Tax planning tips

• The restriction to tax relief on landlords’ finance costs doesn’t apply to corporate landlords, therefore the benefit of acquiring new residential letting property through a limited company should be to be revisited;
• The tax advantages of owning rental property through a limited company have already been restricted with the ATED levy therefore a cost/benefit analysis is required to identify the most tax efficient solution;
• The restriction does not apply to furnished holiday lettings – so these should be considered as a rental option in more detail;
• Overall the restriction is likely to benefit first time buyers by reducing competition from buy to let landlords.

Removal of annual Wear & Tear allowance

Currently available for residential property which is let furnished, the Wear & Tear allowance is calculated as 10% x rental income less council tax and is in place to compensate landlords for wear & tear of furnishings.

The allowance will be abolished from April 2016 and will be replaced with a new relief that allows all residential landlords to deduct the actual cost of replacing furnishings only.

Tax planning tips

• The new relief for the replacement of furnishings will apply to landlords of unfurnished lettings when they replace white goods for example;
• Capital allowances, which have been extended indefinitely to £200,000 per annum, continue to apply for landlords of furnished holiday lets.

Increase in rent-a-room relief

Rent-a-room tax relief provides that tax free income can be received from renting out a room or rooms in your house. With effect from 6 April 2016, it is being increased from £4,250 to £7,500 per year per property, therefore if two joint property owners claim; the relief is halved for each. It also specifically relates to rooms rented out in your principal private residence (PPR), but this may also be a guest house or B&B.

To discuss any aspect of property tax and the potential impact of the Budget further please contact Lesley Stalker by emailing las@rjp.co.uk.