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Taxing Changes for Landlords of Residential Property

Individual owners of buy-to-let properties need to be aware of some very significant changes which are to be introduced from the 2017-18 tax year concerning the way that tax relief is provided on loan interest. 

Changes are also planned from 2016-17 involving the abolition of the ‘wear and tear’ allowance on furnished lettings as well as an increase in Stamp Duty Land Tax charged on the purchase of let properties and second homes.

Changes to Loan Interest Tax Relief

Currently landlords paying loan/mortgage interest on let residential property are allowed to deduct any interest as an allowable business expense in arriving at net assessable rental income. This effectively provides tax relief at an individual’s marginal rate of tax which can be as high as 45%. This of course is out of line with the treatment of loan interest for owners of private residences where mortgage interest no longer enjoys any tax relief since the abolition of MIRAS in 2000.

The planned change involves replacing the current tax treatment of interest as an allowable deduction from rents by providing tax relief on interest only at the basic rate of 20% irrespective of the landlord’s marginal income tax rate.

In order to mitigate the effect of the changes the new rules are being phased in over four tax years as follows:

Tax Year

% of interest deducted from profits

% as a reduction at basic rate

2017/18

75%

25%

2018/19

50%

50%

2019/20

25%

75%

2020/21

NIL

100%

Once the new rules are fully in force from 2020/21 they will impact most on landlords of let properties which are heavily mortgaged and with marginal tax rates of 40% or 45%. 

Where a landlord makes a loss on a let property, unused basic rate tax credit can be carried forward to the next tax year, but not of course any losses arising from deducting interest from profit

It should be noted that the above new rules only apply to properties which are let residentially by individuals and partnership landlords and not by limited companies. Neither do the changes apply to the letting of qualifying furnished holiday lettings or commercial property.

At the time of writing it is understood that a legal challenge is to be mounted by an eminent QC on the basis that the new policy breaches the European Convention of Human Rights. It is felt that the planned changes to the tax treatment of loan interest discriminates against the smaller landlord who may well incur effective tax rates of over 100% while in realty making an economic loss on letting a property. Arguably these new restrictions provide an unfair commercial advantage to other categories of landlord who will be unaffected by the changes.

Abolition of Wear and Tear Allowance

Currently landlords of furnished property are allowed to claim ‘wear and tear allowance’ on the contents calculated broadly as a notional 10% of rental income.

This rule currently permits such an allowance to be claimed without the need to keep a detailed record of actual expenditure incurred on the replacement of furniture, carpets, linen, crockery etc.

From 6 April 2016 the wear and tear allowance is to be abolished so that landlords will only be allowed to claim for actual expenditure incurred on replacing furniture etc. The claiming of capital allowances by owners of furnished holiday lets is not affected.

Given the date of the forthcoming change it may well be worth landlords delaying any expenditure plans until after 5 April 2016 so that qualifying expenditure falls within the new rules.

Stamp Duty Increases

From 6 April 2016 buy-to-let landlords and second home owners purchasing property in England and Wales incur a 3% surcharge on each band of stamp duty as follows:

Property Cost

Normal Stamp Duty rate

Buy-to-let and second home rate

Up to £125,000

0%

3%

£125k to £150k

2%

5%

£250k ~ £925k 

5%

8%

£925k ~ £1.5million

10%

13%

Over £1.5million

12%

15%

Further Advice

If you own and let out residential property and would like to discuss the impact of the changes outlined above in more detail then please do not hesitate to call us on 01633 215544 or email us at contact@marshvision.com 

Should there be any further developments to the contents of this article then these will be fully covered in our Marsh Vision 2016 Budget Review which will be issued on Thursday 17 March 2016, the day after the Chancellor’s Budget Statement.