Summer budget. Residential properties; what landlords should know

In the summer budget there were two announcements affecting the tax relief available to individual landlords who let out residential properties expected to take effect from next April.

Wear and Tear Allowance

This allowance is currently an option for landlords who let out a furnished residential property. Essentially the landlord may elect to claim tax relief on 10% of net rents as an expense each year instead of the actual costs incurred on replacing utensils or repairing furniture. There will now be a consultation to replace this allowance with a new relief from April 2016 that allows all residential landlords to deduct the actual costs of replacing furnishings.

For landlords who currently claim the Wear and Tear Allowance they could see fluctuations in their taxable profits as these will be dependent on actual expenditure in the future. There may be action to take and we will advise further when full details of the new relief are known. However, we would suggest you contact your adviser before incurring any significant expenditure.

Restricting finance cost relief

This will affect higher and additional tax payers with residential lettings, unless they are furnished holiday lets, who claim mortgage interest payments against rental income. Legislation has been drafted to be phased in from 6 April 2017 to reduce the higher rate tax relief available over a four year period.

Currently finance costs are deducted directly from the rents giving the taxpayer tax relief at their highest rate. Under the new rules the finance costs will not be deducted in this way. Instead the tax relief will be gradually reduced over the next five years to just 20% by reducing the individuals overall tax liability.

It is not yet clear what will happen where mortgage interest currently creates a loss that will be used against future rental profits.

Illustration for a higher rate taxpayer (40%) with finance costs of say £3,000 each year

Tax                               Existing tax                   Maximum tax relief
Year                             relief at 40%                  under new rules

2016/17                         £1,200                          £1,200
2017/18                         £1,200                          £1,050
2018/19                         £1,200                             £900
2019/20                         £1,200                             £750
2020/21                         £1,200                             £600

As can be seen, for landlords who are higher rate taxpayers, the tax burden will increase over time. However, there are ways of mitigating this and you may wish to contact us to discuss your options.