The 2015 Summer Budget contained three changes to the taxation of property income (not including the increased inheritance tax relief). From the point of view of the landlord these can be categorised into the three (slightly clichéd) categories.
Rent-a-room relief is to be significantly increased from April 2016. The relief, which is available to those who are renting out a room in their own house and the amount that can be received tax free has been static at £4,250 since 1997. The revised tax free amount will be nearly double that at £7,500.
The relief also covers Bed & Breakfast receipts as long as the rooms are in the landlord’s main residence. The Treasury expects 10,000 people to no longer need to complete self assessment tax returns as a result of the change.
George Osborne announced the removal of the Wear and Tear allowance, which is the deduction available for furnished residential property landlords. This allowance has not been in the legislation for long; it was only enshrined in law from April 2013 after being an extra statutory concession prior to that, so it was unexpected to see any change in this Budget. Under the current rules, landlords can deduct 10% of their rental receipts to account for the depreciation and replacement of furnishings. This is now changing from April 2016.
The current system will be replaced with a new relief where landlords can only claim the costs that they actually incur when replacing furnishings in their property.
The ostensible upside is that the new relief will be available to all landlords, not just those with furnished properties. However, the landlords of unfurnished or partly furnished properties were already able to claim for the costs of furniture in their properties through the ‘tools’ provisions in the current legislation.
The overall result of the new rules is therefore that the landlords of furnished properties will no longer be able to claim the Wear and Tear allowance, the effect of which was to smooth rental profits over periods. Those who are spending large amounts on furniture may be better off in the longer term, but those who do not replace furniture regularly will lose out.
The final property tax announcement was definitely ‘Ugly’. ‘Ugly’ for property landlords who will see their tax relief reduced and ‘Ugly’ for us as the calculations that will be required to get property income right on tax returns are pretty complex and convoluted.
In simple terms, tax relief for mortgage interest payments on residential properties will be restricted to the basic rate of tax. This means that landlords who are higher or additional rate taxpayers will see their tax bills increasing. The Chancellor announced that this measure would be phased in gradually from April 2017. The cynical amongst us may suggest that this is to avoid the inevitable property selling spree and associated damage to house prices that would result from an immediate cliff edge style introduction.
We won’t bore you with the detailed mechanics of the restriction but, broadly, in 2017/18 higher/additional rate relief will only be available on 75% of a landlord’s mortgage interest, with the remaining 25% attracting basic rate tax relief only. This proportion will increase by 25% each year until 2020/21 when 100% of a landlord’s mortgage interest will only get basic rate tax relief.
George Osborne said that this was ‘a big Budget for a country with big ambitions’, but based on the three measures explored above, this was definitely not a Budget for landlords.