Once the dust has settled on what was a radical far reaching budget by Chancellor of the Exchequer George Osborne, one of the more unexpected changes was the reform that will be brought in to change the way that property landlords will be taxed in future. There were several changes which we will examine in this blog
Tax relief on mortgage interest
Currently where a loan or mortgage is taken out to purchase, or renovate an investment property full tax relief is available. From April 2017 tax relief on the interest paid on buy to let loans will be restricted so that by 2020 the interest will no longer be an allowable expense in calculating rental income profits. Relief will be given on the interest but only at a rate of 20%.
The tax relief will be phased out over a four year period:
- 2017/18 75% full relief 25% subject to the new legislation (relief given at 20%)
- 2018/19 50% full relief 50% subject to the new legislation
- 2019/20 25% full relief 75% subject to the new legislation
- 2020/21 0% full relief 100% subject to the new legislation
The impact of this change is probably best explained by way of an example
A couple who own a large portfolio of rented properties, but have no other sources of income
. 2016/17 2020/21
Gross rents received 500000 500000
Other costs 140000 140000
Loan interest 250000 0
Taxable Rental profit 110000 360000
Personal Allowances x 2 22000 0
Basic Rate @ 20% 12800 12800
Higher Rate @ 40% 9600 94400
Additional rate @ 45% 0 27000
Less Interest relief @ 20% on £250000 0 (50000)
Net tax liability 22400 84200
The underlying profit is unchanged at £110,000, however the tax payable will almost quadruple, almost certainly making this couple look to sell substantial amounts of the portfolio.
Alternatively this could have the unintended consequence of forcing rental prices substantially up.
Wear & Tear Allowance
Under current legislation landlords of both fully furnished residential lettings and holiday lettings have the opportunity to claim a tax deduction of 10% of the gross rent received each year. This relief was there to cover the cost of replacing furniture and white goods.
From April 2016 the wear & tear allowance is going to be abolished. Tax relief will now be available when expenditure is made, however, information is so far a bit sketchy on exactly what will be allowable and how much will be allowable or whether there will be a cap introduced.
It’s interesting that in the 2013 budget legislation was enacted, where landlords of partly furnished or unfurnished properties were denied tax relief on the replacement cost of white goods, many of which then started providing furniture to let their properties on a fully furnished basis. The relief they were expecting to receive has now been abolished.
It is crucial that property landlords take early advice on how the budget proposals will affect them, in order that they can formulate an effect plan and most importantly giving them sufficient time to implement it.
We would be happy to discuss any aspects of this with property landlords