Landlords should be aware of new taxation proposals

File photo dated 25/06/13 of a general view of a residential area in East Sussex as as many as one home in every street in some places of England are at risk of being repossessed, according to a housing and homelessness charity. PRESS ASSOCIATION Photo. Issue date: Saturday October 12, 2013. Unemployment and the high cost of living are leaving many households on a "knife-edge", Shelter said. The number of possession claims across England has increased, according to figures released by the charity which it says are based on a combination of Ministry of Justice statistics and 2011 census data. The figures relate to possession claims, which are applications made to a court by lenders and landlords to repossess a house, the first step to get a possession order. See PA story ECONOMY Repossession. Photo credit should read: Chris Ison/PA Wire ENGPPP00120131014124918
File photo dated 25/06/13 of a general view of a residential area in East Sussex as as many as one home in every street in some places of England are at risk of being repossessed, according to a housing and homelessness charity. PRESS ASSOCIATION Photo. Issue date: Saturday October 12, 2013. Unemployment and the high cost of living are leaving many households on a "knife-edge", Shelter said. The number of possession claims across England has increased, according to figures released by the charity which it says are based on a combination of Ministry of Justice statistics and 2011 census data. The figures relate to possession claims, which are applications made to a court by lenders and landlords to repossess a house, the first step to get a possession order. See PA story ECONOMY Repossession. Photo credit should read: Chris Ison/PA Wire ENGPPP00120131014124918
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Landlords should be aware of changes in taxation that could cover them. I’ve highlighted a couple in this week’s column...

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. It can only be used on a fully-furnished property.

Here is an example of how it currently works. A landlord rents out a property for £600pm and the tenant is responsible for all of the property running costs (such as utility bills). Annual rental income is therefore £7,200 so 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 £9,600 but the utility bills of £1,200 have to be deducted before the wear and tear allowance can be calculated, giving a claim of £840.

Instead, the new relief covers the actual cost of replacing items provided for the use of the tenant in the let property. Items covered will be beds, curtains, linens, crockery, cutlery, carpets, TVs 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. Hence 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 is proposed to 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.