The Summer Budget included three significant announcements which signaled changes to tax relief for residential landlords. These are likely to have far-reaching implications for many property investors, including farmers and estates with surplus farmworkers’ cottages which are let out.
Relief for landlords’ finance costs: loss of tax relief
The most significant change is the reduction in income tax relief residential landlords will be able to claim on finance costs. Most critically finance costs include interest on loans to purchase or carry out work to a let residential property, but the term also extends to mortgage arrangement fees, and interest on loans to buy furniture or fixtures.
The measures will apply to most residential landlords who are subject to income tax on their property income, including trusts and personal representatives, the exception being furnished holiday lets. The new rules will not apply to commercial property or to companies charged to corporation tax.
For the residential landlords affected, the new rules will restrict relief on finance costs to the basic rate of tax, and will be phased in over a four-year period from 6 April 2017 (the 2017/18 tax year) at the following rates: Before the changes, they would have received tax relief of £2,000, a cash reduction of £250.
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The way in which the basic rate relief is given will create complexity where non-investment income and/or property income are low compared to financing costs, and will result in some finance costs not attracting relief in the year in which they are incurred. However, relief for any excess finance costs may be carried forward to the following years
Rent-a-room relief in your own home
Rent-a-room relief has remained frozen at £4,250 since 1997. This relief has increased to £7,500 from 6 April 2016 onwards and applies to income from letting out furnished accommodation in your home. The relief is halved if the property income is shared with a partner or someone else. You can let out a room or an entire floor. You can opt into the scheme at any time if you are a resident landlord, whether or not you own your home, including if you run a bed and breakfast or a guest house.
Wear & tear allowance
This allowance was abolished from 6 April 2016. At present, it is understood that a new relief will allow a deduction based on the actual costs of replacing furnishings, known as Replacement Furniture Relief, and will be available to all residential landlords whether the property is furnished, partly furnished or unfurnished. The cost to buy the original item is not expected to be allowable.
The type of items will be limited to those used by tenants. Certain items are deemed to be part of the fabric of the property itself (e.g. baths, toilets, boilers and fitted kitchens), and it is expected that replacement of these will continue to be treated as a repair to the property itself.
If your a landlord and want to speak to a member of our expert team about tax relief for residential landlords please do not hesitate to contact us.