Changes to the taxation of residential property tax

Changes to the taxation of residential property tax

Do you own and let property? If so, there are a number of changes coming up that you need to be aware of. The way your rental income is calculated is changing – and, more importantly, so are the deductions you can make from your rents for income tax purposes.

These changes include:

  1. An increase in the rent-a-room allowance.
  2. The abolition of the wear and tear allowance if you let furnished residential property that’s not part of a holiday lets business – and the introduction of a new replacement furniture relief.
  3. The gradual restriction of higher-rate income tax relief for finance costs.

It’s number three that has the potential to affect your tax costs.

Have you built your property portfolio by borrowing significant amounts when adding properties to your letting business? If you have, the gradual restriction of higher-rate tax relief on finance costs is likely to have a big impact – and if this sounds like you, we’d advise talking to your professional adviser as soon as possible.

So let’s take a look at all these property changes in a little more detail:

An increase in the rent-a-room allowance

Currently, you can earn up to ÂŁ4,250 per annum tax-free from letting out furnished accommodation in your home. This amount is halved if you share this income with anyone else.

From 6 April 2016, the £4,250 limit is increasing to £7,500 – good news if you’re making use of this relief and were looking to increase your tax-free income.

The abolition of the wear and tear allowance

The Government has announced that it will be replacing the wear and tear allowance (WTA) with a new replacement furniture relief from April 2016.

At present, if you’re a landlord of a fully furnished property,you can claim an annual deduction based on 10% of your rent to compensate you for periodic replacement of furnishings. This deduction is given even if you’ve not actually had to buy any furniture, so it’s well worth factoring it into your tax planning. But bear in mind that ifyour actual expenditure is higher than the 10% WTA,you won’t get any additional relief.

So, why is WTA changing?

As WTA is based on the rent received, landlords in areas where property values (and therefore rents) are higher are currently receiving an unfair advantage.And that’s because the amount of relief they’re claiming will be inflated even though their actual expenditure will be the same across the UK.

To address this inequality, the WTA is being abolished from 6 April 2016. You’ll only be affected by the change if you’re a landlord of a fully furnished property – holiday-let properties and unfurnished properties weren’t eligible for the WTA.

The new replacement furniture relief

From 6 April 2016, the replacement furniture relief (RTF) will take over from the WTA. If you’re a landlord of a fully, partly or unfurnished residential property,you can claim for the actual cost of replacing furnishings. As before, the relief isn’t available to furnished holiday-let businesses.

So, what qualifies for the RTF? The items covered include:

  • Moveable furniture or furnishings, such as beds or suites,
  • Televisions,
  • Fridges or freezers,
  • Carpets and floor coverings,
  • Curtains,
  • Linen,
  • Crockery or cutlery,
  • Beds and other furniture.

Fixtures that are part of the building and wouldn’t normally be removed if the owner sold the building won’t qualify for the RFR. These fixtures include:

  • Baths,
  • Washbasins,
  • Toilets,
  • Boilers,
  • Fitted kitchen units.

Additional considerations:

  • The new relief will only apply to replacement costs. The initial cost of furnishing a property wouldn’t be included.
  • The RFR will be based on the replacement cost less any proceeds from the sale of the replaced item.
  • Any improvement cost would be excluded from RFR. So, for example, if you replaced a washing machine with a washer/dryer that cost ÂŁ600, only the replacement cost of a similar washing machine, say ÂŁ400, would be allowed.

The gradual restriction of higher rate income tax relief for finance costs

This is the change that’s likely to have the biggest impact if you’ve been building up a property portfolio.

The restriction of income tax relief will apply to individuals:

  • You let residential property in the UK or elsewhere, and
  • You’re claiming a deduction for financing costs (see below for list of costs included) from April 2017, and
  • You pay income tax on you property income at the higher (40%) or additional (45%) rates.

It won’t apply to:

  • Financing costs for purchase of furnished holiday-let property,
  • Property businesses subject to corporation tax – owned by companies, or
  • Individuals who pay tax on their property income at basic rate only.

The new measure will gradually restrict landlords’ tax relief, for finance costs to purchase residential properties, to the basic rate of income tax. From 6 April 2020 landlords affected will no longer be able to deduct their finance costs from their property income. Instead they’ll receive a basic rate deduction from their income tax liability.

We’ve looked at the potential impact this change could have on property income and would be very happy to sit down and run through the numbers with you. As with all tax, good planning is the key to being tax-efficient.

Talk to us about your property tax planning

If you think these changes to property tax are likely to affect your letting business, we’d advise coming to talk to us sooner rather than later. Prompt action will help to understand the true impact of the changes on your income and tax, and will give time to set up tax planning options to minimise the impact on your property revenues.

Landlords have until April 2017 to consider the effects of this measure on their property businesses. Get in touch if you’d like to explore your planning options in more detail.