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Tax Changes for Landlords of Rented Residential Accommodation

Tax Changes for Landlords of Rented Residential Accommodation

In this summer’s budget the Chancellor announced a number of tax changes aimed at the buy-to-let housing sector.

The first of these changes relates to the wear and tear allowances. Currently 10% (broadly) of rental income can be claimed as a tax deductible allowance for furnished residential lettings. The supposed benefits of flat rate systems, such as this one, are the reduced administrative costs when compared to regulating systems based on actual costs.

However, starting from 6th April 2016, the current flat-rate system will be replaced by a system whereby landlords will only be able to deduct only the actual costs incurred for new or replacement items. It may be hoped that offering deductions on an actual costs basis will incentivise landlords to improve the furnishings of their rented residential properties.

Relief will be available on items such as:

  • Beds & Linen
  • Tables & Chairs
  • Wardrobes
  • Carpets, Rugs and Floor Coverings
  • White Goods – Refrigerators, Cookers, Washing Machines

It would therefore be advisable to delay any purchases of such items until the new tax year, in order to make best use of the allowances available under the new rules.

A further change, which has resulted in strongly divided opinion, will see mortgage interest gradually eradicated as a tax deductible expense for higher and additional rate taxpayers, between the April 2017 and April 2020.

Beginning in the 2017/18 tax year, 25% of the mortgage interest will be added back to rental profit. For basic rate taxpayers (total income up to £43,300 – including the personal allowance) the total tax payable will be unchanged, as a deduction equal to the basic rate of 20% will be allowed. Whilst higher and additional rate taxpayers will also receive the basic rate deduction, the changes will see them pay an additional 20-25% of their mortgage interest in tax.

The % of mortgage interest added back will increase by a further 25% in each tax year until reaching 100% in the 2020/21 tax year.

 

We have produced the following example to illustrate the combined effect of these changes. The example is based on rental income of £16,000 each year with fixed mortgage interest of £800.

  • In the 2015-16 tax year the landlord purchased an A+ rated fridge freezer for £200.
  • In the 2016-17 tax year a new A rated cooker was purchased for £500.
  • In the 2017-18 tax year new carpets were purchased for £1,500.
  • In the 2018-19 tax year 2 new double beds were purchased for £300 each, alongside a corner sofa for £1,295 and 2 wardrobes for £400 each.
  15/16 16/17 17/18 18/19 19/20 20/21
Rental Income £16,000 £16,000 £16,000 £16,000 £16,000 £16,000
Mortgage Interest -£4,000 -£4,000 -£4,000 -£4,000 -£4,000 -£4,000
Mortgage Interest Restriction 0 £0 £1,000 £2,000 £3,000 £4,000
Wear & Tear Allowance -£1,500 -£500 -£1,500 -£2,695 0 0
Profit on which Tax is Payable £10,500 £11,500 £11,500 £11,305 £15,000 £16,000
Tax @ 20% £2,100 £2,300 £2,300 £2,261 £3,000 £3,200
Tax @ 40% £4,200 £4,600 £4,600 £4,522 £6,000 £6,400
Tax @ 45% £4,725 £5,175 £5,175 £5,087 £6,750 £7,200
Tax Deduction (20% of Disallowed Interest) 0 0 -£200 -£400 -£600 -£800
Total Tax Payable for each Tax Rate £2,100 £2,300 £2,100 £1,861 £2,400 £2,400
£4,200 £4,600 £4,400 £4,122 £5,400 £5,600
£4,725 £5,175 £4,975 £4,687 £6,150 £6,400
Total Tax Payable Under the Current System £2,100 £2,100 £2,100 £2,100 £2,100 £2,100
£4,200 £4,200 £4,200 £4,200 £4,200 £4,200
£4,725 £4,725 £4,725 £4,725 £4,725 £4,725

 

 

 

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