The Summer Budget was packed full of announcements, and one of the key stakeholders significantly affected by what the Chancellor announced, were landlords of residential properties.
The Treasury and the Bank of England have become increasingly concerned about the amount of debt outstanding in respect of buy-to-let mortgages, which is thought to be in the region of £2 billion. This makes the UK very vulnerable if there were to be a property price crash and could bring the banking sector to its knees once again.
As a result, the Chancellor used the Summer Budget to undertake some 'rebalancing' and start 'levelling the playing field' between renting and owning.
Removal of the Wear & Tear Allowance
Under current proposals, from next year the annual Wear and Tear Allowance will be removed. This Allowance serves to reduce property income and is available against lettings of furnished, residential properties. It was intended to account for the deterioration of the fixtures and fittings. It does not cover fixtures that are deemed to be 'integral' to the building, such as baths, toilets, etc.
Instead of the Wear and Tear Allowance, landlords will be able to deduct the actual costs they incur on replacing furnishings in the property, but no tax relief will be available on the initial cost of furnishing a property. The new relief will be available to unfurnished and part-furnished properties, as well as fully-furnished.
Newer landlords or those undertaking refurbishment of their properties might benefit from the change, as they will be investing in kitting-out their properties. But well-established landlords whose properties need very little upkeep year-to-year are likely to miss the Wear and Tear Allowance.
Increase in Rent-a-room Relief
On the plus side, it was announced that 'rent-a-room' relief would finally increase next year. After 18 years of being at £4,250, it will increase to £7,500.
Rent-a-room relief allows you to let out furnished accommodation in your home, tax-free, subject to the threshold. The threshold is halved if you share the income with your partner or someone else.
The relief is open to anyone renting out room (i.e. a room or even an entire floor) in their home, whether they own the property or not. It is therefore available to people running bed and breakfasts and guest houses.
Restrictions to tax relief on mortgage interest
From April 2017, the offset of mortgage interest available to higher rate taxpayer landlords will gradually be reduced to the basic rate. Under the four-year withdrawal of the relief, in 2017/18 landlords will only be able to apply the existing relief rules to 75% of their finance costs with the remaining 25% using the basic rate reduction. The following three years will see the proportion change by 25% each year before the basic rate cap applies in full from 2020/21.
Landlords who have small borrowings or are basic rate taxpayers, will be unaffected by the change. However, those who took advantage when access to finance was more relaxed, could be hit by the fall in their tax-deductible expenses- and therefore a rise in their tax liability.
Unfortunately, these changes could have an impact on first-time buyers. Landlords are likely to increase the rents they charge in order to account for the increase in their tax liabilities, which will hamper first-time buyers’ ability to save for their deposit.
The mortgage interest restriction applies to individuals owning properties - not companies. Further plans to cut Corporation Tax were also announced in the Summer Budget, so operating as a limited company may become more viable.
However, the tax advantages for owners of limited companies have been slashed significantly, so it is important to seek advice if you’re considering taking that step.
Read more about how small companies have been affected by the Summer Budget.
How we can help
Your local TaxAssist Accountant can discuss how the changes may impact on your tax position- and therefore your cashflow. They can also review your affairs and help you structure them in the most tax-efficient way that suits your needs.
By Jo Nockels
Last updated July 2015