Tax Changes to Affect Landlords in 2016.

Following last year’s Budget announced by George Osbourne, we have had to come to terms with the fact that Mortgage Interest Relief for residential landlords will be restricted to the basic income tax of 20%. In addition, landlords will no longer be entitled to a wear and tear allowance for furnished properties.

Under the current rules the full amount of finance costs paid by Landlords are allowed as deduction against rental income.

The new rules will be introduced gradually over a three year period starting from 6 April 2017, and relief will be available as follows:

  • In 2017/18, the deduction from property income will be restricted to 75% of the finance costs incurred, with the remaining 25% being available as a basic rate reduction.
  • In 2018/19, 50% of the finance costs will be given as deduction and the remaining 50% will be given as a basic rate reduction.
  • In 2019/20, 25% of the finance costs will be given as deduction and the remaining 75% will be given as a basic rate reduction.

Wear and Tear Allowances

From April 2016 the formal Wear and Tear Allowance – which allows 10% of rental profits to be written off for wear and tear, even if there has been no such actual expenditure in that particular year – will be replaced with a relief that enables all landlords to deduct the costs they actually incur on replacing furnishings in the property.

HMRC has announced the scope of the changes in a consultation document. One important point is that whereas the old wear and tear tax break applied only to fully-furnished properties, agents and landlords will in future no longer need to decide whether their property is sufficiently furnished to claim the new replacement furniture relief. This is because the new relief will apply to all landlords of residential dwelling houses, no matter what the level of furnishing.


The Reaction.

There has already been waves of opinions from the nation’s property experts, and they have already predicted that these proposals will ultimately force landlords to increase rents to compensate for this. Additionally, a petition has been set up against the Mortgage Interest Relief, so far, it’s obtained over 50,000 signatures, which is over half way to getting the subject debated in Parliament, the deadline for this is 27th January 2016. To sign the petition follow this link: https://petition.parliament.uk/petitions/104880. Their argument is that individual landlords are already taxed more heavily than other homeowners. The private rented sector is heavily reliant on individual landlords. The planned change is likely to result in higher rents due to landlords looking to offset higher tax liabilities. In some cases, employed individuals own buy to let properties as investments for retirement. The planned restriction would adversely and unfairly affect them.

The Governments’ Response.

By restricting finance cost relief available to the basic rate of income tax (20%) all finance costs incurred by individual landlords will be treated the same by the tax system. This recognises the benefits to the economy that investment in property can bring but ensures the landlords with the largest incomes will no longer benefit from higher rates of tax relief.

By unifying the treatment of finance costs for all individual landlords, the Government is reducing the distortion between property investment and investment in other assets, and reducing the advantage landlords may have in the property market over ordinary homebuyers.

Less than 1 in 5 (18%) of individual landlords are expected to pay more tax as a result of this measure. Taking account of the other measures from the Summer Budget, the Office of Budget Responsibility (OBR) have not adjusted their forecast for house prices. The OBR expect the impact on the housing market will be small. Furthermore, this change is being introduced gradually from April 2017 over 4 years. This will give landlords time to plan for and adjust to these changes.


For more information the official policy paper is listed here:

https://www.gov.uk/government/publications/restricting-finance-cost-reli…

Follow Keylet News for the latest on everything property

http://www.keylet.co.uk/news

Alex Evans

You May Also Enjoy

small house bird box
Breaking News

UK First Time Buyers better off than many other global nations

Is it really that bad being a first-time buyer? UK better off than many other global nations when it comes to affordability The latest market analysis from Yopa, the full-service estate agents, reveals that first-time buyers (FTBs) in the UK may be paying 63% more to get a foot on the property ladder than they…
Read More
new build homes colchester essex
Breaking News

Building Safety Regulator Reform

The Government has announced reforms to the Building Safety Regulator, including leadership, process and investment. The changes are hoped to deliver 1.5 million homes. The reforms pave the way for creation of a single construction safety regulator, as recommended by the Grenfell Tower enquiry. David Smith, property litigation partner at London law firm Spector Constant…
Read More
Breaking News

New anti-money laundering rules now in effect: what landlords need to know

New anti-money laundering (AML) rules came into effect this month, marking a significant change for landlords and the lettings industry as a whole. The new rules mean financial sanctions checks are now required for all lettings, regardless of how much rent is charged. Here, Steve Bond, managing director of residential lettings for Beresfords, explains what…
Read More
Breaking News

What landlords need to know about the upcoming Renters Rights Bill

The government’s long-awaited Renters Rights Bill is one of the most significant overhauls of the private rental sector in decades. While it has not yet received royal assent, the legislation is expected to come into effect late this year, or early in 2026. With the bill moving closer to becoming law, Steven Bond, managing director…
Read More
Breaking News

Mortgage approvals bounce back in May

The latest figures show that: – Mortgage approvals on house purchases for May sat at 63,032 up 3.9% from 60,656 in April. The monthly increase seen in May marks the end of four months of previous decline, with approval levels having fallen each month since January of this year. Approvals are also 2.5% higher than…
Read More
Breaking News

Money and Credit – May 2025

Key points: Net borrowing of mortgage debt by individuals increased by £2.8 billion to £2.1 billion in May, following a large decrease in net borrowing of £13.8 billion to -£0.8 billion in April. Net mortgage approvals for house purchases increased by 2,400 to 63,000 in May. Approvals for remortgaging also increased by 6,200 to 41,500…
Read More