George Osborne delivered his first Conservative Budget this
Summer and announced two significant changes for individual
buy-to-let landlords of residential property, which will reduce after
‘Wear and tear’ allowance
The ‘wear and tear’ allowance provides a deduction of (broadly) 10% of rental income, where a property is let furnished. From April 2016, the ‘wear and tear’ allowance will no longer be available and replaced by a system allowing deduction only for the actual costs of replacing certain furnishings.
Restricted relief for finance costs
Under the current rules, individual landlords can deduct mortgage interest to calculate their taxable rental profit. It was announced at the Summer Budget that deduction for mortgage interest will be restricted to basic rate (20%) income tax and this will be phased in over 4 years from April 2017 as follows –
- Tax year 2017/18 – 75% of mortgage interest will be fully allowable and the remaining 25% available at the basic rate;
- Tax year 2018/19 – 50% of mortgage interest will be fully allowable and the remaining 50% available at the basic rate;
- Tax year 2019/20 – 25% of mortgage interest will be fully allowable and the remaining 75% available at the basic rate; and
- Tax year 2020/21 – mortgage interest deduction will only be given at the basic rate.
With interest rates expected to rise sometime in the next year, buy-to-let landlords with significant debt will see a reduction in tax relief which will naturally result in higher costs and lower after tax profits. For example, a buy-to-let landlord with debt of £250,000 and interest charged at 3.25% will see their annual income tax liability increase by approximately £2,000 (if they are a 45% taxpayer).
Higher rate and additional rate taxpayers investing in residential property will need to consider the appropriate property ownership structure in light of the changes. A corporate structure is likely to be more attractive going forwards, as the same restriction for mortgage interest will not apply to companies. In addition, the main rate of corporation tax will reduce to 18% by 2020, further increasing the difference between corporate and personal tax rates.
For more information, please contact your usual Blick Rothenberg contact or Nimesh Shah, partner, on +44 (0)20 7544 8746 or at firstname.lastname@example.org