On July 8, 2015 George Osborne delivered the first Conservative budget for almost 20 years.
It set out a number of key spending and taxation plans, several of which were aimed specifically at landlords.
The most substantial change introduced is the restriction of tax relief for financing costs (such as mortgage interest, loan interest for the purchase of furnishings and associated fees) incurred on UK-let residential properties (excluding furnished holiday lettings).
Currently all of these costs can be offset against the rental income to secure tax relief at the marginal tax rate (presently either 20, 40 or 45 per cent, depending on one’s other taxable income).
From April 6, 2017, only 75 per cent of the financing costs can be claimed against rental income and therefore relievable at the marginal tax rate. For the remaining 25 per cent basic rate tax relief only (presently 20 per cent) will be available as a deduction from one’s income tax liability.
Over the following two tax years, the percentages reduce to 50 per cent/50 per cent then 25 per cent/75 per cent and from April 6, 2020 the tax relief on the whole of the financing costs will be restricted to basic-rate tax only.
There will be no adverse tax impact if landlords are liable to basic-rate tax only, although landlords liable to higher or additional rate tax will see an increase in tax payable.
The wear and tear allowance for fully-furnished residential lettings will also be removed from April 6, 2016. Currently, landlords can claim ten per cent of the rental income as a deduction, whether or not any expenditure is incurred. Replacing this is a proposed ‘Replacement Furniture Relief’ which is subject to ratification by HMRC before April 6, 2016.
It is anticipated that any tax relief extended to unfurnished and part-furnished lettings (but excluding furnished holiday letting businesses) will be restricted to expenditure actually incurred in replacing furnishings, with the usual deduction for improvements.
No initial costs of furnishing a property will be allowable.
Rent a Room relief will be increased from the current £4,250 to £7,500 from April 6, 2016.
This applies where a person rents out a furnished room in their own home and is the first time that there has been an increase since 1997.
This means the majority of households renting a furnished room outside of London will not need to pay any tax at all on these profits.
By Ashley Partridge
George Ide, LLP
Solicitors of Chichester and Bognor Regis
Telephone 01243 786668