Unexpected announcements for residential property landlords
There were some unexpected and some might say unwelcome announcements for residential landlords in the Chancellor’s summer 2015 budget. The headlines were grabbed by the removal of the wear and tear allowance and restrictions on tax relief for mortgage interest.
Wear & Tear Allowance
Residential landlords letting furnished property will see their tax affairs become more complicated from April 2016 following the Chancellor’s decision to abolish wear and tear allowance.
Currently instead of claiming for the cost of buying or replacing furniture and furnishings in their let residential property, landlords can simply deduct 10% of the gross rents after adjusting for the cost of utilities and rates they have paid on the tenant’s behalf.
The government has explained that it is abolishing the tax allowance so that landlords instead will get tax relief for their actual expenditure. The Chancellor argued that by giving tax relief regardless of whether any expenditure was incurred gave no incentive for landlords to spend money improving their properties. Additionally the wear and tear allowance is based on rental income, so was disproportionately more beneficial to property located in certain areas.
Replacement furniture relief
From April 2016 wear and tear allowance will be replaced by Replacement Furniture Relief.
Essentially there will be no longer be a difference between letting furnished and unfurnished residential property. There will still be no deduction for the original cost of an asset such as a bed, washing machine or sofa. However all residential landlords will be allowed to claim for the cost of replacing assets provided in the property. Records will need to be kept of such assets acquired each tax year for inclusion the accounts.
It is intended that Replacement Furniture Relief will apply to the same type of assets as currently covered by wear and tear allowance. These include:
- movable furniture or furnishings, such as beds or sofas
- televisions, washing machines, fridges, freezers and other appliances
- carpets and floor-coverings
- curtains and linen
- crockery or cutlery
- beds and other furniture
The government is consulting on how to implement rules on upgrading white goods, for example replacing an old washing machine with a new washer/dryer. At present they propose to require landlords to claim only for the cost that would have been incurred in replacing the old asset on a like-for-like basis. For example replacing a washing machine with an identical model would cost £400 and a new washer/dryer would be £600. Under current proposals, the landlord would deduct £400 against their profits, being the cost of replacing the original asset. The extra £200 relating to the “upgrade” will not qualify for any relief.
There is some good news for landlords with previously unfurnished or part-furnished properties which historically did not meet the criteria for claiming wear and tear allowance. The new Replacement Furniture Relief will apply to all residential properties. Claims will now be allowed for replacing assets where they would not previously have been permitted.
Commercial landlords and those letting property which meet the criteria for furnished holiday lettings will not be affected by the new rules. Wear and tear allowance was not available on these types of property. Instead they will still be able to claim capital allowances for assets purchased and used in their letting businesses.
Restrictions on mortgage interest
Commencing in April 2017 residential landlords will have tax relief restricted on the mortgage interest they claim in connection with their let property. Rather than receiving tax relief at their marginal rate, all landlords regardless of their tax position will in effect receive a maximum of 20% tax relief once the proposals take full effect in April 2021.
Marginal rate tax relief will be phased out over a four year period with a reducing proportion of loan interest being deducted against rental income.
% of interest
As well as mortgage interest, the restriction applies to other finance costs such as interest on loans to buy furniture as well as fees incurred with re-mortgaging and paying off debts.
Tax relief on finance costs is not restricted for loans in connection with properties meeting the criteria for furnished holiday lettings.
The rules will be difficult to calculate and more landlords will require the services of a professional accountant to help calculate the correct amount to claim.
Rent a Room relief
There was some good news for landlords amongst the budget announcements. Those who take in lodgers and claim rent a room relief will be pleased to see the tax-free allowance will increase to £7,500 from 6 April 2016.
Rent a room relief is available for letting a room in your main residence. Any rent and/or contribution to household expenses is only taxable if it exceeds the threshold which will now increase from its current level of £4,250. Where two people receive the rental income jointly for a property they occupy and let out a separate room, they are each entitled to half of the annual threshold.
In certain circumstances Rent a Room relief can also apply to guest houses and B&Bs, providing the individual lives in the property as their main residence. However it may be beneficial to these taxpayers to claim for their actual expenses if they exceed more than £7,500 per year which is the alternative to claiming Rent a Room relief.
For further details and assistance please contact Nigel Landsman, Head of Private Client, on 020 7969 5549 or firstname.lastname@example.org