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…
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