There are proposals to change 2 important aspects of property to let – the Wear and Tear Allowance, and Tax Relief on Buy to Let mortgages. Read on…
Wear and Tear Allowance To Be Replaced
If you currently rent out residential property then HMRC have published a consultation document which may well affect you. They propose to replace the wear and tear allowance with a new relief that will enable the landlord to deduct the costs of replacing furnishings in the property. However, the initial cost of furnishing the property will be excluded.
At the moment many property landlords use the wear and tear allowance which is a flat rate 10% allowance, but can only be used only a fully furnished property. Here is an example of how it currently works:
A landlord rents out a property for £600 per month and the tenant is responsible for all of the property running costs (such as utility bills). Annual rental income is therefore £7200 so a wear and tear allowance of £720 can be claimed. Another example is a landlord rents out a property for £800pm, but is responsible for all the utility bills which total £100pm. Annual rental income is £9600 but the utility bills of £1200 have to be deducted before the wear and tear allowance can be calculated, giving a claim of £840.
The new proposal will mean the relief covers the actual cost of replacing items provided for the use of the tenant in the let property, items such as beds, curtains, linens, crockery, cutlery, carpets, tv’s and moveable furniture.
Fixtures and fittings that are integral to the property such as baths, kitchen units and boilers are not included as the replacement costs of these can be claimed as a property repair cost.
It is proposed to start from April 2016 and will apply to landlords of unfurnished, part furnished and furnished properties. However, it will not apply to furnished holiday lettings and the rental of commercial property.
Restriction Of Interest Relief On Buy To Let Mortgages
Currently a landlord receives full tax relief on the mortgage interest paid on a buy to let property – so if you are a higher rate tax payer, you receive 40% tax relief and a basic rate tax payer receives 20% relief. However, the budget proposed to restrict relief to 20% for all rates of tax payer. It’s expected that this will start coming into effect from April 2017 but will only be fully implemented from April 2020. We are awaiting more detailed information on the proposals but the restriction is to apply to finance costs so we are to assume that it also covers mortgage fees too.
As finance costs tend to be the largest expense on rental properties, if you are a higher rate tax payer it is likely that this may increase your tax bill significantly.
For more information, or to discuss how these proposals will affect you, get in touch.