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Tax implications and changes

February 3, 2017 Martyn Arnold

Changes have now been introduced in the way in which landlords can claim tax relief on the cost of their finance.

Following is some guidance as to the way in which changes to tax relief may affect you as a landlord. Please note that we are giving this information as an experienced Lettings Agent and not accountants, therefore for any tax advice please refer to your accountants.

The changes apply to the following expenses:

  • The costs relating to finance (ie. interest on mortgages, overdrafts and loans (including loans to buy furniture, etc.)
  • Fees (loan arrangement, early repayment, etc.)

The changes apply to the following:

  • Individuals – both UK resident and non UK resident – who let out residential property – either in the UK or overseas.
  • Individuals in partnerships who let out property as above.
  • Trustees or the beneficiaries of trusts who are liable for income tax on the property profits.

The changes do not apply to:

  • Companies
  • Furnished Holiday Lettings
  • Commercial Property

The Current Situation

An individual can offset the costs of their finance (on property which they rent out) along with all their other allowable costs against their total Income (both renting and from other sources) and pay income tax on the balance at whatever tax threshold applies to their net income.

Changes

From the tax year beginning April 2017 changes will be introduced over a four year period so that a growing proportion of finance costs will not be able to be claimed as a cost but INSTEAD there will be an additional basic rate tax allowance

Year 2017/18 75% deducted in the current way & 25% basic rate allowance
Year 2018/19 50% deducted in the current way & 50% basic rate allowance
Year 2019/20 25% deducted in the current way & 75% basic rate allowance
Year 2020/21 0% deducted in the current way & 100% basic rate allowance

Additional Allowance

The basic rate tax allowance is applied to whichever is lower

  • The finance costs that are not deducted in the current way
  • The property profits (ie income less allowable finance and other costs)
  • The adjusted total income (over and above the Personal allowance). This is the total taxable income (less PA)

If the finance costs are not the lowest of these three then any unused finance costs (ie. the difference between finance costs and the figure used for calculation) can be carried forward to the following year.

The Effect of the Changes

The effects of this can be varied. It is likely that most people will have to pay more tax. It is also quite possible that some landlords who are just below the threshold for the higher rate of tax might be pushed over that threshold. However some taxpayers may remain unaffected.

Wear and Tear Allowance

The wear and tear allowance for landlords of furnished property has now been abolished and has been replaced by a straightforward replacement allowance. A landlord can now claim for the capital expenditure on furniture, furnishings, appliances (inc. white goods) and kitchenware as long as they are replacement items for use in the rented establishment.

The claim can be for:

  • the cost of the item (limited to the cost of an equivalent item and not an improvement)
  • the cost of disposal of the old item less any income from that disposal

Please note that we are giving this information as an experienced Lettings Agent and not accountants, therefore for any tax advice please refer to your accountants.

If you would like to discuss any of the above please contact us on marishelle@countryhousecompany.co.uk or call 02392 632275

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