Residential property landlords have been targeted by new legislation which may potentially lead to higher tax liabilities. Below are the key changes:
Restriction of mortgage interest relief
From April 2017 the amount of tax relief obtainable from mortgage interest costs for higher rate taxpayers will start to reduce so that by 2020/21 only basic rate tax relief is available. The change will be phased in over the four years.
For example, if you are a higher rate tax payer with £5,000 of mortgage interest on your rental property, the interest would previously have saved you tax of £2,000. By 2020, the tax relief will only be worth £1,000. This could even leave some landlords with more tax to pay than profit generated!
The end of the 10% “wear and tear” allowance
This allowance was available to landlords of fully furnished properties, who could claim 10% of the gross rents as a deduction against rental profits. As of 6 April 2016, this generous allowance has been removed.
Tax relief is now only available on the cost of replacing furnishings, i.e. there is no relief for items introduced for the first time unless the property qualifies as a “furnished holiday let”.
There are further restrictions to consider:
- Relief cannot be claimed in full if a replacement item represents a significant improvement in specification, such as replacing a washing machine with a washer-dryer. The relief is restricted to the cost of a “like for like” replacement.
- If you receive any money for the disposed item, this should be netted off against the cost of the replacement.
Stamp Duty and Capital Gains Tax
As well as the new 3% stamp duty surcharge on second property purchases, an 8% CGT surcharge applies to capital gains made on sale, i.e. an effective maximum CGT rate of 28% compared to just 20% for other types of capital gain.
Get in touch
With the above changes it is important to make sure that landlords have the most tax efficient structures and strategies in place for their property portfolios. We are here to help if you wish to discuss the options available to you.