The government has made significant changes to the tax relief available for landlords, which are now beginning to take effect. If you are working on your 2016/17 tax return, here are the main points you need to know about.
What are the changes and when do they come into effect?
Firstly, the 10% Wear and Tear allowance for fully furnished properties has been abolished, applying to all property income received after 5th April 2016.
However, this has been replaced by a new relief, which is available to landlords of both furnished and unfurnished properties. The new relief is not as generous as the blanket 10% of net rents, as it relates to specific claims for the actual cost of replacement furniture, furnishings, appliances and kitchenware provided for the tenants’ use in the let property.
In addition, restrictions are being introduced to tax relief for interest on loans taken out for the purchase of rental properties. 2016/17 is the last year for which full interest relief will be available to those landlords who pay tax above the basic rate band of 20%. This change is being phased in between 2017/18 and 2019/20, with the new system applying entirely from 6th April 2020.
What will be the impact of the changes?
By 6th April 2020, those who fall into the 40% tax band could see as much as a 50% reduction in the tax relief available for the loan interest normally claimable against their let property income.
Furthermore, these changes mean there is potential for people who were not 40% tax payers in the past to move into a higher tax band, which in turn may affect their ability to claim Child Benefit.
What happens next?
Many institutions are lobbying the chancellor to reverse these tax changes, but it is unlikely that this will be successful.
Individual landlords should therefore consider the following:
- Are these changes likely to mean that your letting or other income will push you into the higher tax band?
- If so, can you split the income with your spouse or partner?
- Would you be able to incorporate your business, thereby bypassing the tax changes? (This would require specialist advice and should not be undertaken lightly.)
- If you do move into a higher tax band, will this affect your Child Benefit?
What is clear is that HMRC are now seeking to gather greater amounts of tax from the letting of property than before, and therefore all landlords should ensure that they seek the appropriate advice from their professional advisors to guide them through these changes.