The Summer Budget was packed full of announcements; so many, in fact, that few people were able to fully appreciate the implications of these change. One of the groups that were specifically singled out for special treatment was landlords of residential property. But what were these proposed changes, and how will they impact on you as a private landlord should the changes receive full assent in 2016 Finance Bill? Here is Steven Glicher accountants summary of the changes.
Why were landlords of residential property singled out?
Well, the Treasury and the Bank of England have expressed increasing concern about the amount of debt now outstanding in the buy-to-let mortgage sector. It is estimated to be in the region of £2 billion. Because of this level of debt the UK is seen as particularly vulnerable if there were ever to be another property price crash. It is thought such a catastrophe could bring the banking sector to its knees once again. These fears prompted Chancellor, George Osborne, to take action to rebalance the market, and “level the playing field” between renting and owning.
So what are the proposed changes?
Removal of the Wear & Tear Allowance
The proposed changes mean that as from next year the annual Wear and Tear Allowance will be removed. The Wear and Tear Allowance is often used to reduce property income and is available against lettings of furnished, residential properties. The purpose of the allowance was to allow landlords to offset income against any deterioration of the fixtures and fittings in the property. However, it does not apply to fixtures that are deemed to be “integral” to the building: fixtures like such as baths and toilets.
Under the new proposals, instead of the Wear and Tear Allowance, landlords will be able to deduct the actual costs they incur on replacing furnishings in the property; however, no tax relief will be available on the initial cost of furnishing a property. The new relief will be available to unfurnished and part-furnished properties, as well as fully-furnished.
Newer landlords or those undertaking refurbishments of their properties could benefit from the change, as they will be investing in fitting-out their properties. But older and more well-established landlords whose properties need very little maintenance year-to-year are likely to miss the Wear and Tear Allowance.
Increase in Rent-a-room Relief
At long last it has been announced that ‘rent-a-room’ relief would finally increase next year. After 18 years of being at £4,250, it will increase to £7,500. That move has been welcomed by landlords and accountants alike.
Rent-a-room relief allows you to let out furnished accommodation in your home, tax-free, subject to the threshold. The threshold is halved if you share the income with a partner or someone else. The relief is open to anyone renting out room (i.e. a room or even an entire floor) in their home; whether they own the property or not. It is therefore available to people running bed and breakfasts and guest houses.
Restrictions to tax relief on mortgage interest
From April 2017, the offset of mortgage interest available to higher rate taxpayer-landlords will gradually be reduced to the basic rate. Under the four-year withdrawal of the relief, in 2017/18 landlords will only be able to apply the existing relief rules to 75 per cent of their finance costs with the remaining 25 per cent using the basic rate reduction. In the following three years the relief will reduce by 25 per cent each year before the basic rate cap applies in full from 2020/21.
Landlords who have small borrowings or are basic rate taxpayers, will be unaffected by the change. However, those who took advantage when access to finance was more relaxed, could be hit by the fall in their tax-deductible expenses- and therefore a rise in their tax liability.
It’s important to remember that none of these proposed changes have yet been legislated, so they could still yet be subject to change before the 2016 Finance Bill is drafted later this year.
What are the future implications for residential landlords?
It is thought these changes could potentially have an impact on first-time buyers. Landlords are likely to increase the rents they charge to compensate for the increase in their tax liabilities, and this could hamper first-time buyers’ ability to save for their deposits.
The mortgage interest restriction applies to individuals owning properties; not companies. Further plans to cut Corporation Tax were also announced in the Summer Budget, so operating as a limited company may become more viable. However, the tax advantages for owners of limited companies have been slashed significantly, so it is important to seek professional accountancy advice if you’re considering taking that step.
How can Steven Glicher accountants help?
Steven Glicher accountant can discuss how the changes may impact on your tax position, and therefore your cashflow. We can also review your affairs and help you structure them in the most tax-efficient way that suits your needs. For further information call Steven Glicher accountants on 0161 4858007 or email info@