Insights

In December we wrote about the 3% increase in stamp duty land tax (SDLT) for landlords (or those buying a second property), which was announced in the recent Budget and is currently under consultation until 1^st February – we will be blogging in more detail about this soon.

Landlords already face tax increases as a result of the phased removal of mortgage interest tax relief and the increase to stamp duty on new investment purchases and there is now another change for landlords coming this year, effective from 6^th April 2016, which removes the availability of the existing flat rate ‘wear and tear’ allowance.

Currently, landlords renting furnished property have the right to claim a flat rate of 10% tax relief against profits to cover wear and tear to furniture and fittings such as household appliances and soft furnishings. This is available regardless of whether any investment in improving the property’s furnishings is made or not; in some instances tax relief claimed by a landlord in a single year may exceed the amount invested. This is set to change. From 6^th April 2016, the flat rate wear and tear allowance will be removed and instead, tax relief on the actual cost of replacement items can be claimed on a like for like basis. Note this relates to replacement items only and not to the original purchase of the items.

Where the purchase of replacement furniture is not essential and can be postponed it may be prudent to delay until after 6^th April 2016; doing so will not affect eligibility to claim the current 10% wear and tear allowance during the tax year ending on 5^th April 2016, but will increase the relief due in the year to 5^th April 2017.

Two common property tax planning scenarios to consider

Landlord 1 has an existing furnished rental property. Household appliances and furniture are functioning but in need of modernisation. Tenants have requested replacements but have accepted that their landlord is not in a position to provide replacements until after 6^th April 2016. The landlord claims his entitlement to 10% wear and tear relief for the last time in the current tax year and then purchases new furniture, appliances and furnishings after 6^th April to take advantage of the new replacement relief. The full actual cost of replacement items can be offset against profits in the 2016-2017 tax year.

Landlord 2 is buying a new property and will be equipping it with furniture from scratch. Under the new rules he or she will get no tax relief if this is a new property being used as a buy to let for the first time. However, if the property is an existing buy to let and old worn out furniture is to be replaced almost immediately (after 6^th April 2016) with new equivalents, this expenditure will be covered by the new tax relief. Under the old rules of wear and tear relief the cost would not qualify for tax relief.

For more detailed advice on tax planning for landlords, please contact Lesley Stalker by emailing las@rjp.co.uk